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Acid Test Ratio

Acid Test / Quick Ratio Assignment / Homework Help
Also referred to as Quick ratio, the acid-test ratio is more stringent measure of liquidity because inventories, which are least liquid of current assets, are excluded from the ratio. Inventories have to go through a two-step process, first being sold and converted into receivables and secondly collected. The quick test is so named because it gives the ability of the firm to pay its liabilities without relying on the sale and recovery of its inventories. The current ratio is computed as:

Quick Assets
Current Liabilities

Quick Assets = Current Assets - Inventories

An Example

Compute acid test ratio from the information given below:

Current assets: Current liabilities:
Inventories $20,000 Accounts payable $18,000
Sundry debtors 5,000 Short-term loan 15,000
Cash on hand 12,000 Bank overdraft 5,000
Cash at bank 8,000 Outstanding expenses 3,000
Accounts receivables 35,000 Provision for taxation 10,000
Short-term investments 15,000 Proposed dividends 12,000
95,000 63,000

Acid-test ratio: (Current Assets - Inventories) / Current Liabilities
(95,000 20,000) / 63,000

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