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?
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