Question

In: Accounting

What is its acid-test (quick) ratio?

A company has cash of $100 million, accounts receivable of $600 million, current assets of $1.2 billion, accounts payable of $400 million, and current liabilities of $900 million. What is its acid-test (quick) ratio?

Solutions

Expert Solution

The acid-test or quick ratio is the ratio of the most liquid assets to current liabilities and provides an even more rigorous test of liquidity than the current ratio. The quick ratio excludes less liquid current assets from the numerator (e.g., prepaid expenses and inventory) and includes only such line items as cash and accounts receivable as provided in the problem. The quick ratio would be computed as follows:

Cash $ 100

Accounts receivable 600

Quick assets $ 700

Current liabilities ÷ 900

Quick ratio 0.78


The acid-test (quick) ratio is 0.78

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