What is the quick (acid test) ratio formula?

What is the quick (acid test) ratio formula?

• A. (current assets - inventory) / current liabilities
• B. (current assets / current liabilities) - inventory
• C. Current assets / (current liabilities - inventory)
• D. (inventory / current assets) x current liabilities

Answer: (A)

The quick (acid-test) ratio measures a company's ability to cover current liabilities using assets that can be quickly turned into cash. Because inventory isn’t always readily liquid, it’s excluded from the numerator. The correct approach is to subtract inventory from current assets, then divide by current liabilities: (current assets minus inventory) / current liabilities. This shows how much immediate liquidity remains from cash, marketable securities, and receivables to cover obligations due soon. If you instead divide current assets by current liabilities and then subtract inventory, or try to adjust the denominator with inventory, you’d lose the focused look at quickly realizable assets. Similarly, placing inventory in the numerator or mixing it with liabilities distorts what the ratio is intended to measure.

The quick (acid-test) ratio measures a company's ability to cover current liabilities using assets that can be quickly turned into cash. Because inventory isn’t always readily liquid, it’s excluded from the numerator. The correct approach is to subtract inventory from current assets, then divide by current liabilities: (current assets minus inventory) / current liabilities.

This shows how much immediate liquidity remains from cash, marketable securities, and receivables to cover obligations due soon. If you instead divide current assets by current liabilities and then subtract inventory, or try to adjust the denominator with inventory, you’d lose the focused look at quickly realizable assets. Similarly, placing inventory in the numerator or mixing it with liabilities distorts what the ratio is intended to measure.