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what does acid test ratio use to calculate the ratio

what does acid test ratio use to calculate the ratio
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Answer #1

The acid test ratio measures the liquidity of the company. This means that this ratio helps to determine whether or not the company would be able to meet its current liabilities with its available liquid assets.

The acid test ratio is computed by using all the liquid assets which can easily be converted to cash and the current liabilities. The liquid assets which can be easily converted to realize cash are marketbale securities, short term investments, accounts receivables.

The formula for computing the acid test ratio is : (Current Assets - Inventory- Prepaid Expenses) / Current Liabilities.

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