What does the quick ratio (acid test) assess?

What does the quick ratio (acid test) assess?

• A. Current assets - Inventory / Current liabilities
• B. Current liabilities - Inventory / Current assets
• C. Current assets + Inventory / Current liabilities
• D. Current assets / Current liabilities + Inventory

Answer: (A)

The quick ratio, also known as the acid test ratio, is a financial metric used to assess a company’s short-term liquidity position by measuring its ability to meet short-term obligations with its most liquid assets. The formula for the quick ratio is calculated as current assets minus inventory divided by current liabilities. This approach excludes inventory from current assets because it is generally considered less liquid compared to cash or receivables; inventory may not be readily convertible into cash in the short term. Therefore, what remains after accounting for inventory are the most liquid assets, which typically include cash, marketable securities, and accounts receivable. By calculating this ratio, stakeholders can evaluate whether the company has enough liquid assets to cover its current liabilities without needing to rely on the sale of inventory. A higher quick ratio indicates a healthier liquidity position, suggesting a company can easily settle its short-term liabilities. Overall, the quick ratio provides a more stringent measure of liquidity compared to the current ratio, which considers all current assets.

The quick ratio, also known as the acid test ratio, is a financial metric used to assess a company’s short-term liquidity position by measuring its ability to meet short-term obligations with its most liquid assets. The formula for the quick ratio is calculated as current assets minus inventory divided by current liabilities.

This approach excludes inventory from current assets because it is generally considered less liquid compared to cash or receivables; inventory may not be readily convertible into cash in the short term. Therefore, what remains after accounting for inventory are the most liquid assets, which typically include cash, marketable securities, and accounts receivable.

By calculating this ratio, stakeholders can evaluate whether the company has enough liquid assets to cover its current liabilities without needing to rely on the sale of inventory. A higher quick ratio indicates a healthier liquidity position, suggesting a company can easily settle its short-term liabilities.

Overall, the quick ratio provides a more stringent measure of liquidity compared to the current ratio, which considers all current assets.