Now let's discuss another ratio called the quick ratio. This is similar to the current ratio, but it's a little more strict. Let's check it out. The quick ratio is sometimes called the acid test ratio and this isn't the 1970s, this isn't turn on, on, tune in, drop out. No, we're studying accounting here, it can't get any more bland. So let's check it out. We've got the quick ratio, it's going to be similar to the current ratio which you've probably studied and remember the current ratio we're talking about current assets, current liabilities, being able to cover those liabilities in the short run. Well, the quick ratio is similar. It is another liquidity ratio, but it's only going to use the most liquid assets in the numerator rather than all of our current assets, we're only going to talk about the most liquid ones. Okay? So let's check out the quick ratio here and notice in our numerator, we no longer have current assets like we did when we studied the current ratio. Instead, we have a small portion of our current assets. We've got cash which is very liquid. Short term investments, those are also very liquid. That could be just shares of stock that you own. Anything that has some marketable value just like if you own a share of Apple stock, right? You could look up the stock price and you could sell that stock right away at a stock price. So that's very liquid. And net accounts receivable, those are generally pretty liquid as well. We're going to be getting the money from our customers pretty soon and even in case we needed the money quicker, we can generally sell our accounts receivable to other companies and get a portion of them now. So they're very liquid as well, okay? So one way that we can calculate the quick ratio is in our numerator to have those. The cash, short term investments, and the net accounts receivable. Right? We could have those in our numerator and then our denominator is the same as the current ratio. It's just all of our current liabilities, right? So we're still want to check, can we cover our current liabilities, but we want to see if we can cover them with these quick assets. These very, very liquid assets. Okay? So another way we can think about the quick ratio is to do it the other way where we take all of our current assets. Notice in this case, we start with all the current assets and this is to calculate the same thing, but except now we're taking all our current assets and we're going to take stuff out that's not super liquid. So our inventory, we take out of our current assets and our prepaid expenses, which are just not as liquid as the ones we described above, right? So in essence, we get to the same thing because those are the 5 most common current assets. Cash, short term investments, accounts receivable, inventory and prepaid expenses. So we're taking out the less liquid ones and leaving only those very, very quick ones. Okay? So how do we analyze this ratio? Well, it's very similar to how we analyze a current ratio. The quick ratio, well, it tells us how many highly liquid assets, so how many dollars of these highly liquid assets we have for each dollar of current liabilities, right? So again, this has a similar red flag again to the current ratio. Very, very similar in analysis. The quick ratio, if we have it below 1, right? If we have a quick ratio below 1, it can be signs of liquidity problems again, right? Because we're talking about being able to cover our current liabilities in the short term and if we're not able to do that, well, we've got liquidity problems. But remember, this is a little more strict, right? We're not talking about all of our current assets. We've been a little more strict than thecurrentratio. So a low currentratio is even more of a red flag than a low quick ratio because when we have inventory prepaid expenses in there, well, that can help us cover our current liabilities in one way or another. Alright? So let's go ahead and do an example and let's use our quick ratio to solve this problem right here. So we've got right here super liquid company, has current assets totaling $ 450,000 and current liabilities totaling 315,000. Included in current assets are 115,000 of inventory, 35,000 of accounts receivable, and 10,000 of prepaid expenses. Current liabilities include 120,000 in short term debt, calculate the quick ratio for SLC. So this is something they love to do in accounting problems and especially in ratio problems

- 1. Introduction to Accounting1h 21m
- 2. Transaction Analysis1h 13m
- 3. Accrual Accounting Concepts2h 38m
- Accrual Accounting vs. Cash Basis Accounting10m
- Revenue Recognition and Expense Recognition24m
- Introduction to Adjusting Journal Entries and Prepaid Expenses36m
- Adjusting Entries: Supplies12m
- Adjusting Entries: Unearned Revenue11m
- Adjusting Entries: Accrued Expenses12m
- Adjusting Entries: Accrued Revenues6m
- Adjusting Entries: Depreciation16m
- Summary of Adjusting Entries7m
- Unadjusted vs Adjusted Trial Balance6m
- Closing Entries10m
- Post-Closing Trial Balance2m

- 4. Merchandising Operations2h 30m
- Service Company vs. Merchandising Company10m
- Net Sales28m
- Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory9m
- Perpetual Inventory - Purchases10m
- Perpetual Inventory - Freight Costs9m
- Perpetual Inventory - Purchase Discounts11m
- Perpetual Inventory - Purchasing Summary6m
- Periodic Inventory - Purchases14m
- Periodic Inventory - Freight Costs7m
- Periodic Inventory - Purchase Discounts10m
- Periodic Inventory - Purchasing Summary6m
- Single-step Income Statement4m
- Multi-step Income Statement17m
- Comprehensive Income2m

- 5. Inventory1h 55m
- Merchandising Company vs. Manufacturing Company6m
- Physical Inventory Count, Ownership of Goods, and Consigned Goods10m
- Specific Identification7m
- Periodic Inventory - FIFO, LIFO, and Average Cost23m
- Perpetual Inventory - FIFO, LIFO, and Average Cost31m
- Financial Statement Effects of Inventory Costing Methods10m
- Lower of Cost or Market11m
- Inventory Errors14m

- 6. Internal Controls and Reporting Cash1h 16m
- 7. Receivables and Investments3h 8m
- Types of Receivables8m
- Net Accounts Receivable: Direct Write-off Method5m
- Net Accounts Receivable: Allowance for Doubtful Accounts13m
- Net Accounts Receivable: Percentage of Sales Method9m
- Net Accounts Receivable: Aging of Receivables Method11m
- Notes Receivable25m
- Introduction to Investments in Securities13m
- Trading Securities31m
- Available-for-Sale (AFS) Securities26m
- Held-to-Maturity (HTM) Securities17m
- Equity Method25m

- 8. Long Lived Assets5h 1m
- Initial Cost of Long Lived Assets42m
- Basket (Lump-sum) Purchases13m
- Ordinary Repairs vs. Capital Improvements10m
- Depreciation: Straight Line32m
- Depreciation: Declining Balance29m
- Depreciation: Units-of-Activity28m
- Depreciation: Summary of Main Methods8m
- Depreciation for Partial Years13m
- Retirement of Plant Assets (No Proceeds)14m
- Sale of Plant Assets18m
- Change in Estimate: Depreciation21m
- Intangible Assets and Amortization17m
- Natural Resources and Depletion16m
- Asset Impairments16m
- Exchange for Similar Assets16m

- 9. Current Liabilities2h 19m
- 10. Time Value of Money1h 23m
- 11. Long Term Liabilities2h 45m
- 12. Stockholders' Equity2h 15m
- Characteristics of a Corporation17m
- Shares Authorized, Issued, and Outstanding9m
- Issuing Par Value Stock12m
- Issuing No Par Value Stock5m
- Issuing Common Stock for Assets or Services8m
- Retained Earnings14m
- Retained Earnings: Prior Period Adjustments9m
- Preferred Stock11m
- Treasury Stock9m
- Dividends and Dividend Preferences17m
- Stock Dividends10m
- Stock Splits9m

- 13. Statement of Cash Flows2h 24m
- 14. Financial Statement Analysis5h 25m
- Horizontal Analysis14m
- Vertical Analysis23m
- Common-sized Statements5m
- Trend Percentages7m
- Discontinued Operations and Extraordinary Items6m
- Introduction to Ratios8m
- Ratios: Earnings Per Share (EPS)10m
- Ratios: Working Capital and the Current Ratio14m
- Ratios: Quick (Acid Test) Ratio12m
- Ratios: Gross Profit Rate9m
- Ratios: Profit Margin7m
- Ratios: Quality of Earnings Ratio8m
- Ratios: Inventory Turnover10m
- Ratios: Average Days in Inventory9m
- Ratios: Accounts Receivable (AR) Turnover9m
- Ratios: Average Collection Period (Days Sales Outstanding)8m
- Ratios: Return on Assets (ROA)8m
- Ratios: Total Asset Turnover5m
- Ratios: Fixed Asset Turnover5m
- Ratios: Profit Margin x Asset Turnover = Return On Assets9m
- Ratios: Accounts Payable Turnover6m
- Ratios: Days Payable Outstanding (DPO)8m
- Ratios: Times Interest Earned (TIE)7m
- Ratios: Debt to Asset Ratio5m
- Ratios: Debt to Equity Ratio5m
- Ratios: Payout Ratio5m
- Ratios: Dividend Yield Ratio7m
- Ratios: Return on Equity (ROE)10m
- Ratios: DuPont Model for Return on Equity (ROE)20m
- Ratios: Free Cash Flow10m
- Ratios: Price-Earnings Ratio (PE Ratio)7m
- Ratios: Book Value per Share of Common Stock7m
- Ratios: Cash to Monthly Cash Expenses8m
- Ratios: Cash Return on Assets7m
- Ratios: Economic Return from Investing6m
- Ratios: Capital Acquisition Ratio6m

- 15. GAAP vs IFRS56m
- GAAP vs. IFRS: Introduction7m
- GAAP vs. IFRS: Classified Balance Sheet6m
- GAAP vs. IFRS: Recording Differences4m
- GAAP vs. IFRS: Adjusting Entries4m
- GAAP vs. IFRS: Merchandising3m
- GAAP vs. IFRS: Inventory3m
- GAAP vs. IFRS: Fraud, Internal Controls, and Cash3m
- GAAP vs. IFRS: Receivables2m
- GAAP vs. IFRS: Long Lived Assets5m
- GAAP vs. IFRS: Liabilities3m
- GAAP vs. IFRS: Stockholders' Equity3m
- GAAP vs. IFRS: Statement of Cash Flows5m
- GAAP vs. IFRS: Analysis and Income Statement Presentation5m

# Ratios: Quick (Acid Test) Ratio - Online Tutor, Practice Problems & Exam Prep

The quick ratio, also known as the acid-test ratio, measures a company's ability to cover its current liabilities with its most liquid assets. It is calculated using the formula: Cash + Short-term Investments + Net Accounts ReceivableCurrent Liabilities. A quick ratio below 1 indicates potential liquidity issues, as it shows insufficient liquid assets to meet short-term obligations. This ratio excludes inventory and prepaid expenses, focusing solely on assets that can be quickly converted to cash.

### Ratios: Quick (Acid Test) Ratio

#### Video transcript

The following table contains selected financial information for Tougher Question, Inc.

Calculate the quick ratio for TQ, Inc.

#### Problem Transcript

### Here’s what students ask on this topic:

What is the quick ratio and how is it calculated?

The quick ratio, also known as the acid-test ratio, measures a company's ability to cover its current liabilities with its most liquid assets. It is calculated using the formula:

$\frac{\mathrm{Cash}+\mathrm{Short}-\mathrm{term}\mathrm{Investments}+\mathrm{Net}\mathrm{Accounts}\mathrm{Receivable}}{\mathrm{Current}\mathrm{Liabilities}}$

This ratio excludes inventory and prepaid expenses, focusing solely on assets that can be quickly converted to cash. A quick ratio below 1 indicates potential liquidity issues, as it shows insufficient liquid assets to meet short-term obligations.

Why is the quick ratio considered more stringent than the current ratio?

The quick ratio is considered more stringent than the current ratio because it only includes the most liquid assets in its calculation, such as cash, short-term investments, and net accounts receivable. Unlike the current ratio, it excludes inventory and prepaid expenses, which are not as easily converted to cash. This stricter approach provides a clearer picture of a company's ability to meet its short-term liabilities without relying on the sale of inventory or the realization of prepaid expenses.

What does a quick ratio below 1 indicate?

A quick ratio below 1 indicates potential liquidity issues for a company. It means that the company does not have enough liquid assets to cover its current liabilities. This can be a red flag for investors and creditors, as it suggests that the company may struggle to meet its short-term obligations, potentially leading to financial difficulties.

How do you calculate the quick ratio if only partial information is given?

If only partial information is given, you can calculate the quick ratio by starting with the total current assets and subtracting the less liquid assets, such as inventory and prepaid expenses. For example, if you know the total current assets, inventory, and prepaid expenses, you can use the formula:

$\frac{\mathrm{Total}\mathrm{Current}\mathrm{Assets}-\mathrm{Inventory}-\mathrm{Prepaid}\mathrm{Expenses}}{\mathrm{Current}\mathrm{Liabilities}}$

This will give you the quick ratio, focusing on the most liquid assets available to cover current liabilities.

What are the components of the quick ratio?

The components of the quick ratio include the most liquid assets, which are:

- Cash
- Short-term investments
- Net accounts receivable

These assets are included in the numerator of the quick ratio formula. The denominator consists of the company's current liabilities. The quick ratio formula is:

$\frac{\mathrm{Cash}+\mathrm{Short}-\mathrm{term}\mathrm{Investments}+\mathrm{Net}\mathrm{Accounts}\mathrm{Receivable}}{\mathrm{Current}\mathrm{Liabilities}}$