Answer to Question #5649 in Finance for LaMarcus Streeter

Question

The acid-test (quick) ratio

a. is the same as the current ratio except it is rounded to the nearest whole percent.

b. is used to quickly determine a company's solvency and long-term debt paying ability.

c. relates cash, short-term investments, and net receivables to current liabilities.

d. is calculated by taking one item from the income statement and one item from the balance sheet.

Answer 1

The acid-test (quick) ratio relates cash, short-term investments, and net receivables to current liabilities.





Quick Ratio (also known as the "acid-test ratio" or the "quick assets ratio") is an indicator of a company's short-term
liquidity. It measures a company's ability to meet its short-term obligations
with its most liquid assets. The higher the quick ratio, the better the position
of the company. The quick ratio is calculated as Current Assets-Inventories
divided on Current Liabilities. Speaking about Current Assets, we can admit that
include cash, accounts receivable, inventory, marketable securities, prepaid
expenses and other liquid assets that can be readily converted to cash. So in
our example cash, short-term investments, and net receivables represent the upper part of the formula of
quick ratio that is related to current liabilities.