Quick ratio, which can be also called Acid Test Ratio, depicts short-term liquidity of the business. This ratio estimates whether the business does have enough very liquid assets to meet current liabilities. For the purpose of calculation, inventory is excluded, and only accounts receivable, marketable securities and cash are included into the calculation.
The following Quick Ratio formula is used for calculation – so explore how to calculate current ratio:
Quick Ratio = (Cash+Marketable Securities+Accounts Receivable) / Current Liabilities
Comparing to Current Ratio, Quick Ratio is more conservative, since it eliminated inventory from current assets. This elimination might be good, since it is not always possible to convert inventory to cash quickly without any losses.
Usually good value of Acid Test Ratio is greater than 1, which would indicate that the business is able to meet its current liabilities when due. The value of this ratio should be compared across companies in the same industry and across years or other period of the same business to provide possibility to judge about the trend in its changes.
Regarding calculation, it is necessary to use the above calculation. Other alternative Quick Ratio formula would be to deduct inventory value from current assets value, however in this way prepaid expenses might be included into the Acid Test ratio calculation, however this category does not belong to liquid asset type.