Virginia Contractor General Practice Test

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Which formula defines the quick ratio?

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

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

The quick ratio, also known as the acid-test ratio, is a financial metric that measures a company's ability to meet its short-term obligations using its most liquid assets. The correct formula for the quick ratio is derived from the definition of what constitutes quick assets, which are essentially current assets excluding inventory. This is why the formula (Current Assets - Inventory) / Current Liabilities accurately represents the quick ratio: it assesses a company’s liquidity by comparing its readily available resources (such as cash, marketable securities, and accounts receivable) against its current liabilities. The exclusion of inventory is crucial because inventory is not always as liquid as other current assets; it may take time to sell it and convert it into cash. Understanding this, it becomes clear why the other options do not correctly define the quick ratio. For instance, adding inventory to current assets or expressing liabilities in relation to just current assets does not provide a true picture of liquidity regarding immediate cash availability.