Acca financial Accounting (FA) Study Text ac ca (FA)

Quick ratio 

Quick ratio

 (also known as the liquidity and acid test) ratio: 

Quick ratio =

 

Current assets – Inventory

Current liabilities

 

: 

1 

The quick ratio is also known as the acid test ratio because by eliminating 

inventory from current assets it provides the acid test of whether the entity has 

sufficient liquid resources (receivables and cash) to settle its liabilities. 

 

 

 

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Interpretation of financial statements 

388

 

KAPLAN PUBLISHING

 

 

Quick ratio 

 

Normal levels for the quick ratio range from 1:1 to 0.7:1. 

Like the current ratio it is relevant to consider the nature of the business 

(again supermarkets have very low quick ratios). 

Sometimes the 

quick ratio

 is calculated on the basis of a six-week time-

frame (i.e. the quick assets are those which will turn into cash in six 

weeks; quick liabilities are those which fall due for payment within six 

weeks). This basis would usually include the following in 

quick assets

: 

•

 

bank, cash and short-term investments 

•

 trade 

receivables. 

thus excluding prepayments and inventory.