gin to this retailer. The retailer's current ratio is 2.1, its acid-test ratio is 0.5, and inventory makes up most of its current Supplier A retailer requests to purchase supplies on credit from your company. You have no prior experience with assets. Do you extend credit? Answer: A current ratio of 2.1 suggests sufficient current assets to cover current liabilities. An acid-test ratio d 0.5 suggests, however, that quick assets can cover only about one-half of current liabilities. This implies that the retailer depends on money from sales of inventory to pay current liabilities. If sales decline, the likelihood that this retailer will default on its payments increases. Your decision is probably not to extend credit. If you do extend credit, you are likely to closely monitor the retailer's financial condition. Gross Margin Ratio Without enough gross profit, a merchandiser can fail. The gross margin ratio helps understand this link. I differs from the profit margin ratio in that it excludes all costs except cost of goods sold. The gross mar gin ratio (also called gross profit ratio) is defined as gross margin (net sales minus cost of goods sold) divided by net sales-see Exhibit 4.18. Net sales Gross margin ratio = Cost of goods sold Net sales