Acid-Test/Quick Ratio

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

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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.

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