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Quick Ratio Formula | Acid Test Ratio | Acid Ratio | Liquid Ratio | Liquidity Ratio
Description: The quick ratio formula excludes inventory from the current assets portion of the current ratio. By doing so, you can gain a better understanding of a company’s very short-term ability to generate cash from more liquid assets, such as accounts receivable and marketable securities.
Formula: To calculate the quick ratio, add together cash, marketable securities, and accounts receivable, and divide the result by current liabilities. Be sure to only include those marketable securities that can be liquidated in the short term, and those receivables that are not significantly overdue. The formula is as follows:
Cash + Marketable Securities + Accounts Receivable
Current Liabilities
Example: The Huff-Puff Shed Company, makers of sheds that are guaranteed not to blow down in any wind under 100 miles per hour, appears to have a comfortably high current ratio of 3:1. The components of that ratio are broken down as follows:
| Account | Amount |
| Cash | $120,000 |
| Marketable securities | $53,000 |
| Accounts receivable | $418,000 |
| Inventory | $2,364,000 |
| Current liabilities | $985,000 |
| Current ratio | 3:1 |
| Quick ratio | 0.6:1 |
This more detailed analysis reveals that the presence of an excessive amount of inventory is making the company’s liquidity look too high with the current ratio. Only by switching to the quick ratio is this problem revealed.
Cautions: The measure may still not give a true measure of corporate liquidity if most of the accounts receivable are not due for some weeks yet, while accounts payable may be due immediately.
Similar Terms
The quick ratio is also known as the acid ratio, the acid test ratio, the liquid ratio, and the liquidity ratio.
Similar Ratios
Cash ratio
Current ratio
Liquidity index