Ratios: Quick (Acid Test) Ratio definitions Flashcards
Ratios: Quick (Acid Test) Ratio definitions
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Quick Ratio A liquidity measure showing how well highly liquid assets can cover current liabilities without relying on inventory or prepaid expenses. Acid Test Ratio Another name for a strict liquidity ratio that excludes less liquid current assets like inventory and prepaid expenses. Liquidity Ratio A financial metric assessing a company's ability to meet short-term obligations using assets easily converted to cash. Current Assets Resources expected to be converted into cash or used up within one year, including cash, receivables, inventory, and prepaid expenses. Current Liabilities Obligations due within one year, such as accounts payable and short-term debt, used as the denominator in liquidity ratios. Cash The most liquid asset, immediately available for settling obligations and always included in the numerator of the quick ratio. Short-Term Investments Marketable securities or assets that can be quickly sold for cash, often included in the quick ratio calculation. Net Accounts Receivable Amounts owed by customers expected to be collected soon, considered highly liquid for quick ratio purposes. Inventory Goods held for sale, excluded from the quick ratio due to lower liquidity compared to other current assets. Prepaid Expenses Payments made in advance for goods or services, excluded from the quick ratio as they cannot be quickly converted to cash. Current Ratio A broader liquidity measure including all current assets, less strict than the quick ratio in assessing short-term solvency. Short-Term Debt A component of current liabilities, representing borrowings due within a year, included in the denominator of the quick ratio. Highly Liquid Assets Resources that can be rapidly converted to cash with minimal loss in value, central to the quick ratio's numerator. Threshold A benchmark value, such as a quick ratio of 1, used to assess whether a company can safely cover its current liabilities. Red Flag A warning indicator, such as a quick ratio below 1, signaling potential liquidity problems for a company.
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