acid-test ratio

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Acid-Test Ratio

A measure of a company's ability to meet its short-term obligations using its most liquid assets. It is calculated by subtracting inventories from current assets and dividing the quantity by its current liabilities. A higher acid-test ratio indicates greater short-term financial health. The acid-test ratio is more conservative than the current ratio, which measures much the same thing, because the current ratio excludes the value of inventory. This is because inventory can be less liquid than other current assets. The acid-test ratio thus measures a company's ability to meet obligations in a worst-case scenario. It is also called the quick ratio.

acid-test ratio

current ratio

or

acid-test ratio

an accounting measure of a firm's ability to pay its short-term liabilities out of its quickly-realizable CURRENT ASSETS, which expresses the firm's liquid current assets (DEBTORS plus cash) as a ratio of CURRENT LIABILITIES. Sometimes called the ‘quick ratio’, this is a more stringent test of liquidity than the WORKING CAPITAL RATIO, because it excludes STOCK from CURRENT ASSETS on the grounds that STOCKS cannot be as readily convertible into cash to meet short-term debts as can DEBTORS where the goods or services have already been sold and only collecting the money remains.
References in periodicals archive ?
Under the asset test, a foreign corporation will be deemed a PFIC if more than 50% of its assets produce, or are held for the production of, passive income.
The asset test is cumbersome because corporate taxpayers must periodically analyze the assets of their foreign subsidiaries to see if such subsidiaries meet the definitional test.
In addition, the asset test should be based on asset values as of the year end preceding the testing year.
In effect, the shareholder is subject to the PFIC rules even if the foreign corporation no longer meets either the passive income or the asset test.
Alternatively, the so-called asset test for determining PFIC status should be refined to ameliorate the heavy compliance burdens imposed by the unexpectedly broad PFIC rules.
856(c)(4) asset test, REIT status is nevertheless preserved, according to Sec.
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1297(a), either a passive income or passive asset test for any tax year.
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1297(a)(2) asset test if 50% or more of its assets generate passive income.
Liquidity facilities may be subject to an eligible asset test such that liquidity providers may not be required to fund against assets initially rated 'AA-' or higher which are subsequently downgraded to 'CCC-' or lower in a single rating action.