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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.