Question

The quick ratio is usually smaller than the current ratio.

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(if you answered this question before, please ignore it. I hope to get some new ideas, thanks)

Answer 1

This statement is TRUE

Quick ratio is usually smaller than the current ratio. The formula for both the ratios is:

Quick ratio = Cash & cash equivalents + Marketable securities + Accounts receivable / Current liabilities

Current ratio = Current assets / Current liabilities.

where, current assets include Cash & cash equivalents, Marketable securities, Accounts receivable, Inventories, prepaid expenses and any other asset which is expected to be realized within one year.

So, from the above we can see that denominator in both the ratios is same viz, current liabilities. Numerator in current ratio is current assets, which includes all the assets to be realized within 1 year and that also includes the assets which are the numerator in quick ratio. So, numerator in current ratio will always be greater than the numerator in quick ratio. It will make quick ratio usually smaller than the current ratio.