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.
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acid-test ratio

Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

current ratio


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.
Collins Dictionary of Business, 3rd ed. © 2002, 2005 C Pass, B Lowes, A Pendleton, L Chadwick, D O’Reilly and M Afferson
References in periodicals archive ?
The 30-month substantial-improvement rule, the 31-month working-capital safe harbor, and the 70% and 90% asset tests combine to provide a framework by which a QOF or subsidiary business can enter into a construction or rehabilitation project with a degree of certainty as to how those projects will comply with the requirements of Sec.
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But, for adults under 65 using the new Medicaid expansion coverage, the ACA killed asset tests. States now look only at applicants' income when deciding whether adults under 65 are eligible for Medicaid.
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[section] 1.1471-5T(e)(5)(i) (B)(1), an expanded affiliated group (EAG) will be a nonfinancial group if the EAG satisfies certain passive income and asset tests (among other things).
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The authors conclude that one-fourth to one-third of the increased take-up was the result of simplified enrollment and more relaxed asset tests that were implemented during this period in an attempt to increase program participation among the working poor.
Use of credit agencies wedded to net tangible asset tests undermines these very policies by disadvantaging asset-light Welsh companies with the ambition to borrow to invest in growth.
The House bill imposes tougher income and asset tests that would cause an estimated 3 million low-income Americans to lose their food stamps.