Acid Test Ratio

Posted in Finance, Accounting and Economics Terms, Total Reads: 3999
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Definition: Acid Test Ratio

The acid-test ratio is a measure to reflect whether the company has sufficient assets to meet its short-term liabilities without selling off its inventory. It is also referred to as quick ratio and its only difference from the current ratio is that inventories are removed from the current assets.

Mathematically, it is calculated as:

Formula:


A value of over 1 suggests that the firm is in a position to meet its liabilities. A large variation of the acid test ratio from the current ratio implies that the assets of the firm are strongly dependent on the inventory.


Example

Assets Liabilities

Cash = 1000                                            Accounts payable = 500

Accounts receivable = 1000               Other short-term liabilities = 500

Inventory = 200

Current assets = 2200                     Current Liabilities = 1000


Acid test ratio = (2200-200)/1000 = 2



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