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Management Information Systems
MGIS 317
Ronald Schlenker

Lecture 1 Acid Test Ratio It ignores the least liquid of the firm´s current assets – inventories. By eliminating the value of the inventories from the acid-test ratios, the users of accounts are given a clearer picture of the firm´s ability to pay short-term debts. ACID-TEST RATIO – LIQUID ASSETS CURRENT LIABILITIES LIQUID ASSETS – CURRENT ASSETS – INVENTORIES = LIQUID ASSETS POINTS TO NOTE:  Results below 1 are often viewed with caution by accountants as this means that the business has less than 1$ of liquid assets to pay each1$ of short-term debt.  The full picture needs to be gained by looking at previous year´s results.  Firms with very high inventory levels will record very different current and acid test ratio
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