Acid-test ratio

The Acid test - ratio or Quick ratio also called the acid test ratio, compares current assets and current liabilities similarly to the current ratio. The quick ratio removes inventory because it is typically the least liquid asset for a corporation and losses typically arise when selling such assets, which is the primary distinction between these two ratios. Short-term prepayments made by the business are also not included in this computation. Given that inventory have been removed from this calculation because they may not be immediately realizable, the quick ratio measures the company's liquidity more strictly than the current ratio. The quick ratio calculates how much current assets are compared to current liabilities. We can argue that the liquidity is good if the current assets can meet the current liabilities. The more crucial liquidity a company has, the lower its current assets to current liabilities ratio.

Quick ratio

Quick ratio = (Current Assets – Inventory)/Current Liabilities.

• Quick assets refer to current assets less inventory & prepaid expenses.
• Current assets refer to cash and cash equivalents, Marketable securities and accounts receivable.
• Current liabilities refer to Accounts payable, short term debts and other short-term liabilities

References

• Alver,J.(2015). [[1] financial statement analysis: the case of Estonia.
• Horngren,C.T.,Harrison Jr,W.T.,Oliver, M.S.,(2012) [[2] Accounting.7th ed.New Jersey:Pearson Prentice Hall.
• The Institute of Chartered Accountant of India(ICAI).,(2021)[[3] Chapter-3:Financial Analysis and Planning-Ratio Analysis

Author: Billa Nalini