Asked by Joanna Harrison on Jul 06, 2024
Verified
The ratios that are used to determine a company's short-term debt paying ability are
A) asset turnover times interest earned current ratio and accounts receivable turnover.
B) times interest earned inventory turnover current ratio and accounts receivable turnover.
C) times interest earned acid-test ratio current ratio and inventory turnover.
D) current ratio acid-test ratio accounts receivable turnover and inventory turnover.
Debt Paying Ability
Debt paying ability indicates an entity's capacity to repay its debt obligations based on its financial situation, including liquidity ratios and income.
Acid-test Ratio
A stringent indicator of a company's liquidity, calculating its ability to cover short-term obligations with its most liquid assets, excluding inventory.
Inventory Turnover
A measure of how often a company's inventory is sold and replaced over a certain period of time, indicating efficiency in inventory management.
- Attain expertise in the computation of current and quick (acid-test) ratios to determine a company's short-term liquidity status.
- Grasp the importance of the accounts receivable turnover ratio in evaluating a company's efficiency in managing receivables.
- Learn how to calculate and use inventory turnover ratio to assess a company's inventory management efficiency.
Verified Answer
NS
Nathan SpencerJul 10, 2024
Final Answer :
D
Explanation :
The ratios commonly used to measure a company's short-term debt paying ability include its current ratio (ability to pay off short-term liabilities with current assets), acid-test ratio (ability to pay off short-term liabilities with quick assets, which are current assets minus inventory), accounts receivable turnover (how quickly the company collects payments from customers), and inventory turnover (how quickly the company sells its inventory). Option D is the only answer that includes all of these ratios.
Learning Objectives
- Attain expertise in the computation of current and quick (acid-test) ratios to determine a company's short-term liquidity status.
- Grasp the importance of the accounts receivable turnover ratio in evaluating a company's efficiency in managing receivables.
- Learn how to calculate and use inventory turnover ratio to assess a company's inventory management efficiency.