Also known as the acid test ratio, a quick ratio measures a firm's ability to meet its short-term financial obligations with its most liquid assets. Find out how to determine this measure of liquidity.
- Step 1: Know that generally, the higher the ratio, the better the position of the firm.
- FACT: In the Wall Street Panic of 1907, banks and securities firms contended with major liquidity problems, and there were runs on several large banks.
- TIP: Quick ratios differs from current ratios in that they do not include inventory and prepaid expenses in the formula. Thus, a business's quick ratio is lower than its current ratio.
- Step 2: Divide the total of cash and accounts receivable by the total dollar amount of the current liabilities to find the quick ratio.
- Step 3: Don't include inventory and prepaid expenses in assets. If they are already included in the total, subtract these from total cash assets.
- Step 4: Add the total dollar amount of accounts receivable to the cash and cash-equivalent assets.
- Step 5: Determine the total dollar amount of cash and cash equivalent assets, such as marketable securities, of the firm.