What is Quick ratio (acid-test ratio)?
In short
The quick ratio measures a company's ability to pay current liabilities with its most liquid assets: cash, marketable securities and net receivables, divided by current liabilities.
Key takeaways
- It leaves out inventory and prepaid expenses, which take longer to turn into cash.
- It is always lower than or equal to the current ratio.
- Paying off a current liability with cash raises the ratio when it is above 1 and lowers it when it is below 1.
Example
Cash $20,000, receivables $40,000, inventory $50,000 and current liabilities $50,000: the quick ratio is 1.2 and the current ratio 2.2.
Where it's tested
BAR: Financial Statement Analysis — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company has current assets of $500,000, including inventory of $200,000 and prepaid expenses of $20,000, and current liabilities of $200,000. What is the quick ratio?