Question

quick ratio definition and how it is calculated

Answer 1

Quick ratio: Quick ratio, also called as acid test ratio, measures liquidity of the firm. It measures whether the firm has sufficient amount of liquid or quick assets (i.e. assets that can be converted into cash in a short period of time, usually 3 months) to pay its short term obligations or current liabilities. The fomula for calculation quick ratio is:

Quick ratio = Current assets - inventories / Current liabilities

where, current assets are assets that will be realized or converted into cash within one year examples include cash, inventories, accounts receivable, short term investments

and current liabilities are liabilities that will be settled or paid into cash within one year, examples include accounts payable, accruals, expenses payable etc.

Usually, a quick ratio of 1 is said to be satisfactory.