Response to the following :
Several comparisons can be made to determine the short-term debt-paying ability of an entity. Some of these are
a. Working capital
b. Current ratio
c. Acid-test ratio
d. Cash ratio
1. Define each of these terms.
2. If the book figures are based on cost, will the results of the preceding computations tend to be understated or overstated? Explain.
3. What figures should be used in order to avoid the problem referred to in (2)?