An Auditor Doing Analytical Analysis Calculates the Acid Test Ratio

Multiple Choice

An auditor doing analytical analysis calculates the acid test ratio for a supermarket. The acid test, or quick, ratio compares a company's most short-term assets to its most short-term liabilities to see if a company has enough cash to pay its immediate liabilities, such as short-term debt. The formula is: Acid Test = (Cash + Marketable Securities + Accounts Receivable) /Current Liabilities
The auditor determines that the ratio is 0.19.
Which of the following conclusions is most valid?

A) The ratio is extremely concerning because the expected average for the acid test ratio is 1.
B) The ratio is extremely good because the expected average for the acid test ratio is 1.
C) The ratio is meaningless for supermarkets and can be safely ignored.
D) To be useful the ratio needs to be compared with previous periods and other supermarkets.