Concept:Short-term solvency is the ability of a business to meet its debts that fall due within one year.
It is measured by comparing current assets with current liabilities using liquidity ratios.
Explanation:The current ratio is also known as the working capital ratio.
It is the primary test of short-term solvency.
The formula is:
Current Ratio=Current LiabilitiesCurrent AssetsA ratio of at least
2:1 shows that the firm can comfortably settle its short-term obligations.
The acid test ratio is a stricter test of immediate liquidity because it excludes stock from current assets.
The gross profit margin measures profitability, not solvency.
The debt-to-equity ratio tests long-term solvency by relating borrowed funds to owners' capital.
Thus, short-term solvency is determined with the current ratio.
Answer:D. current