As observed above, one defect of the current ratio is that it fails to convey any information on the composition of the current assets of a firm. A rupee of cash is considered equivalent to a rupee of inventory or receivables. But it is not so. A rupee of cash is more readily available (i.e. more liquid) to meet current obligations than a rupee of. say, inventory. This impairs the usefulness of the current ratio. The acid-test ratio is a measure of liquidity designed to overcome this defect of the current ratio. It is often referred to as quick ratio because it is a measurement of a firm’s ability to convert its current assets quickly into cash in order to meet its current liabilities. Thus, it is a measure of quick or acid liquidity.
The acid-test ratio is the ratio between quick current assets and current liabilities and is calculated by dividing the quick assets by the current liabilities
The term quick assets refers to current assets which em he converted into cash immediately or at a short notice without diminution of value. Included in this category of current assets are bank balances, (ii) short-term marketable securities and (iii) debtors/receivable, the current is which are excluded are: prepaid expenses the inventor. The exclusion (If inventory is based on the reasoning that it is not ability conflation, into cash, paid expenses by their very nature an: not available to payoff current debts. They have reduce the amount of cash required in one period because of payment in a prior period.