- Quick ratio
In
finance , the Acid-test or quick ratio or liquid ratio measures the ability of a company to use its "near cash " orquick asset s to immediately extinguish or retire its current liabilities.Quick asset s include thosecurrent asset s that presumably can be quickly converted to cash at close to theirbook value s. Such items are cash, cash equivalents such as marketable securities, and someaccounts receivable . This ratio indicates a firm's capacity to maintain operations as usual with current cash ornear cash reserves in bad periods. As such, this ratio implies aliquidation approach and does not recognize the revolving nature of current assets and liabilities. The ratio compares a company's cash and short-term investments to the financial liabilities the company is expected to incur within a year's time.mbox{Current Ratio} = frac {mbox{Current Assets {mbox{Current Liabilities
OR
mbox{Quick (Acid Test) Ratio} = {mbox{Current Assets} - mbox{(Inventory}+ mbox{Staff Salaries} + mbox{Supplies} +mbox{Prepayments)}over mbox{Current Liabilities} - mbox{Bank overdraft
Generally, the acid test ratio should be 1:1 or better, however this varies widely by industry. [cite book
last=Tracy
first=John A.
title=How to Read a Financial Report: Wringing Vital Signs Out of the Numbers
pages=pp. 173
year=2004
publisher=John Wiley and Sons
isbn=0471646938 ]ee also
*
Current Ratio "*Accounting liquidity "References
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