However, they are also used in the financial industry. Liquid assets are equal to total current assets minus inventories and prepaid expenses. Acid Test Ratio/Liquid Ratio/Quick Ratio is a measure of a company’s immediate short-term liquidity. Quick ratio, also known as the acid test ratio measure the ability of the company to repay the short term debts with the help of the most liquid assets and it is calculated by adding total cash and equivalents, accounts receivable and the marketable investments of the company and then dividing it by its total current liabilities. Research and publish the best content. The ratio is also known as a Quick Ratio. The acid-test ratio is a more severe test of a business’s solvency (its capability to pay the liabilities that will come due in the short term) than the current ratio. Acid test ratio results can also be less than 1.0x, when the business has more short-term liabilities than liquid assets. Acid-Test Ratio Definition with examples - Quick ratio or acid test ratio is the measure of firm's ability to pay off its short term liabilities, quick assets are the assets which are convertible into cash within 1 year Quick (acid-test) ratio = Cash + marketable securities + net receivables Current liabilities Immediate short-term liquidity Benchmark: PG, HA, ROT (>1) Cash ratio = Cash + marketable securities Current liabilities More conservative than quick ratio as it excludes net receivables (all of which may not be collected) Benchmark: PG, HA, ROT (>40-50%) Formula to Calculate Acid Test Ratio. Get Started for FREE Sign up with Facebook Sign up with Twitter I don't have a Facebook or a Twitter account Investors and lenders calculate the acid-test ratio — also known as the quick ratio or the pounce ratio — to test a business’s short-term solvency. Quick ratio analysis Generally, the acid test ratio should be high because it indicates that a business has a strong ability to meet its current liabilities. Acid test Ratio=(Cash + Accounts Receivable + Short term Investments) / (Current Liabilities) Where, Cash – Money or currency that can be accessed immediately (in rupees) Accounts Receivable – Money owed to a company by providing the services (in rupees) In order to calculate acid test ratio, it is required to measure the availability of current assets and the closing inventory compared to current liabilities. acid test ratio quick ratio formula definition example Professionals often think acid-test ratio or liquidity are chemical terms and they are just used to refer to chemical processes. The acid test ratio is considered as a more reliable source of testing short-term solvency than current ratio or working capital ratio, however, a company may have high acid test ratio with slow payings debtors or it may have low acid test ratio despite having fast moving inventories. The ability of a company to meet its short term liabilities with liquid assets is termed as quick ratio. Formula of Acid Test Ratio. acid test ratio quick ratio formula definition example Professionals often think acid-test ratio or liquidity are chemical terms and they are just used to refer to chemical processes. Acid test ratio results can also be less than 1.0x, when the business has more short-term liabilities than liquid assets. Acid-test ratio formula. Acid Test Ratio is also known as quick ratio, and it measures the current position of the company. The acid-test ratio is calculated by taking a company's quick assets and dividing them by its current liabilities. The quick ratio for XYZ company in the current year is 1.053, which compared with the baseline of 1.303 indicates reducing its ability to service short-term obligations. It measures the relationship between liquid assets and current liabilities.