A Business Encyclopedia

Acid-test Ratio

Definition: The Acid Test Ratio also referred to as a Quick Ratio is calculated to determine the ability of a firm to pay off its current liabilities with Quick Assets. What are Quick Assets? The quick assets are the current assets that are highly liquid and can be converted into cash within 90 days or in a short period of time.

Generally, all the current assets are the quick assets, but however, the inventory is subtracted from its value because inventories are not readily convertible into cash. The acid-test ratio is a key indicator for the investor to know if the firm is capable of paying its short-term bills on time.

Ideally, the quick ratio equal to or more than 1 is considered favorable; that shows the company is having more liquid assets and do not rely heavily on the inventories. The formula for computing the Acid-test Ratio is:

Acid-test Ratio = Quick Asset/ Current Liabilities

Higher the Acid-test Ratio, the higher is the debt-paying capacity of a firm.

Example: Suppose a firm has a cash balance of Rs 50,000, the marketable securities worth Rs 10,000, and account receivables amounting to Rs 1,00,000 (inclusive of inventories worth Rs 40,000). The current liabilities are Rs 60,000. Then the Acid test ratio will be:

Acid-test Ratio = 1,20,000/60,000 = 2:1

[Quick Asset = (50,000+10,000+1,00,000) – 60,000 = 1,20,000]

Leave a Reply

Your email address will not be published. Required fields are marked *


Related pages

define ojtcheque clearing definitioncritical incident method of performance appraisalunofficial communication channeloligopoly market structureordinal pointsinterpretation of total asset turnover ratiodefine the elasticity of demandcaptive pricing examplesmodified irremploys provident fundexplain market segmentation with examplesdefine whistleblowing policyordinal theoryinformal networksmeaning divestmentconstant elasticity demand functiondisadvantages of a narrow span of controlmoratorium period education loanethnocentrism meaningmonopolistic competition definitionwhat is peak load pricingdefine debenture stockfactors affecting price elasticity of demandtwo bin kanban systemportors five forcesdemand forecasting methods pptspeculation stock market definitionautocratic decision makingprinciple of henri fayolsampling and nonsampling errorscomputerised systemsasset turnover ratiosspearman's coefficient of rank correlationdemand function in economicsgolden growth modelmonetisedexample of spearman correlationwhat is meaning of spam in hindiwhat is the erg theorydetermines meaning in hindiclassical organizational theoriesdavid mcclelland theory of needsdefine transactional analysiscause of cost push inflationmotives of inventory managementdefinition of monetarismmeaning of abc analysisapex bank meaningdefinition of required reserve ratiosematic meaningmcclelland's acquired needs theoryhicksiandefine deontology theorydefine delphi methodprimal and dual linear programming problemstypes of transactional analysis pptenovation meaningiso quantcyclical unemployementtreasury bill auctioninnovate meaning in hindiadvantages of hrppoacher meanvroom vie theorydiversification meaning in hindiwhat is classical conditioning definitiondiversification economics definitioncheque lockboxcomputerized inventory management systemoligopoly marketsthe employees provident funds scheme 1952 account balancetaylor's theory of scientific managementhuman resource management defeconometric method of demand forecasting