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 results indicated increase in profitability and gearing ratios and decrease in PE, equity and quick ratios. The study by Punda (15), on UK companies found that, though UK GAAP and IFRS are very much similar in many aspects, still there was sizeable difference in financial ratios after conversion to IFRS, with respect to profitability and liquidity ratios.
Different ratios are often used to measure liquidity such as quick and adjusted quick ratios. Striving to evaluate the worst case scenario VaR or LaVaR may be applied.
It is also important to remember that one can expect a relationship to hold between the current and quick ratios and the cash conversion cycle, but it may either be positive as Richards and Laughlin (1980) argue, or negative, as Lyroudi and McCarty (1993) have reported.
So pull out your game playbook (budget), print out your year-to-date profit and loss statement, balance sheet, financials for the same time period in 2012, and a copy of s your key performance ratios like gross margin, inventory turns, current and quick ratios, accounts receivable aging, ROI, to name a few.
In a similar manner, current and quick ratios declined marginally but stayed quite high.
Nevertheless, in accounting and auditing textbooks, the current and quick ratios continue to be the focus of liquidity analysis.
These theories predict that firms with higher leverage, shorter debt maturity, lower interest coverage, and less liquidity (e.g., lower quick ratios) are more likely to use derivatives to hedge financial risk.
In other words, 1987-1991 quick ratios were averaged to predict the 1994 CII, while 1991-1995 quick ratios were averaged to predict the 1998 CII.
Top 10 home furnishings retailers' quick ratios for the most recent quarter
In this analysis, we use the current and quick ratios. The current ratio is current assets divided by current liabilities.