Virginia Contractor General Practice Test

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What is the formula for calculating the Quick Ratio?

(Current Assets + Inventory) / Current Liabilities
(Current Assets - Inventory) / Current Liabilities
(Current Liabilities - Inventory) / Current Assets
(Current Assets) / (Current Liabilities - Inventory)

The correct answer is: (Current Assets - Inventory) / Current Liabilities

The Quick Ratio, also known as the acid-test ratio, is a financial metric used to assess a company's ability to meet its short-term obligations without relying on the sale of inventory. The formula for calculating the Quick Ratio is designed to focus on the most liquid assets, which are those that can be quickly converted into cash. By taking current assets and subtracting inventory, the formula highlights the assets that can be readily accessed for covering current liabilities. This gives a clearer picture of a company's liquidity position because it excludes inventory, which may not be as easily converted into cash in the short term compared to other current assets like cash and accounts receivable. The mathematical representation, (Current Assets - Inventory) / Current Liabilities, thus effectively evaluates a company's short-term financial health by focusing solely on those assets that are available for immediate use. This makes B the correct choice, as it aligns with the established definition and calculation of the Quick Ratio in financial analysis.