The Acid-test or quick ratio or liquid ratio shows a firm’s ability to meet current liabilities with its most liquid assets. It measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately. Quick assets include those current assets which are readily converted to cash at close to their book values. It is expressed as follows:
Current liabilities include all items of all items of current liabilities except bank overdraft.
1:1 ratio is considered ideal ratio for a concern because it is wise to keep the liquid assets at least equal to the liquid liabilities at all times.
A company with a Quick Ratio of less than 1 can not currently pay back its current liabilities.
NEXT – Liquidity Measurement Ratios: Cash Ratio
Table of Contents
1) Liquidity Measurement Ratios: Introduction
2) Liquidity Measurement Ratios: Current Ratio
3) Liquidity Measurement Ratios: Quick Ratio
4) Liquidity Measurement Ratios: Cash Ratio