Posted in Finance, Accounting and Economics Terms, Total Reads: 4089
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.
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.
Cash = 1000 Accounts payable = 500
Accounts receivable = 1000 Other short-term liabilities = 500