The Acid Test Ratio is a measure of corporate liquidity found by subtracting inventory from current assets and dividing the result by the current liabilities. This is used to test a corporation’s ability to meet its short term liabilities.
The acid test is also known as the “quick ratio” because when inventory is deducted from a company’s current assets. The remaining assets are referred to as the quick assets. I.e.: quick assets are cash and its equivalents; accounts receivable; all of which can be converted into cash quickly and easily. When the quick assets are divided by the current liabilities the result shows how many times over the company could pay their current liabilities if need be. Remember current assets are those that can be converted into cash in less than 12 months. Current liabilities are payments must be made within 12 months.
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