Discussion
The appropriate ratio for indicating liquidity crisis is
Answer: D
The acid test ratio, or quick ratio, is quick assets divided by current liabilities. It leaves out inventory and prepaid items, which cannot readily be turned into cash, so it is the better indicator of a liquidity crisis, a shortage of immediately available funds.
The operating ratio and the sales turnover ratio measure efficiency and profitability, not short term payment ability. The current ratio does show liquidity, but it includes stock, which may be slow to sell, so it can hide a crisis. The acid test is therefore the more appropriate warning sign.
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