The quick ratio is a financial ratio used to gauge a company’s liquidity. The quick ratio is also known as the acid test ratio.

The quick ratio compares the total amount of cash + marketable securities + accounts receivable to the amount of current liabilities. If a company has cash + marketable securities + accounts receivable with a total of $1,000,000 and the company’s total amount of current liabilities is $1,200,000, its quick ratio is 0.83 to 1. ($1,000,000 divided by $1,200,000 = 0.83)

The quick ratio differs from the current ratio in that some current assets are excluded from the quick ratio. The most significant current asset that is excluded is inventory. The reason is that inventory might not turn to cash quickly.

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About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

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