Acid-Test Ratio Formula & Example

Definition: Acid-Test Ratio (also known as Quick ratio) is the ratio of the sum of quick assets (excluding stocks) to the current liabilities of a business.

Formula:
Acid-Test Ratio = (Current Assets - Stock) / Current Liabilities
Or,
Acid-Test Ratio = (Cash + Bank + Debtors) / Current Liabilities

Example 1:
The following information relates to ABC Ltd. as at 31 December 2009:
Tangible fixed assets $550,000
Intangible fixed assets $50,000
Total current assets $470,000
Stocks $70,000
Cash $300,000
Debtors $100,000
Current liabilities $250,000
Capital $820,000
Calculate the Quick ratio.

Answer:
Quick ratio = (470,000 - 70,000) / 250,000 = 1.6
This means that liquid assets are 1.6 times current liabilities.

Example 2:
The following data from Johnson Ltd. as at 31 December 2007 are given:
Cash in hand $20,000
Trade creditors $30,000
Accruals $35,000
Bank $51,000
Trade debtors $9,000
Stocks $72,000
Calculate Acid Test Ratio.

Answer:
Acid Test Ratio = (20,000 + 51,000 + 9,000) / (30,000 + 35,000) = 1.23

* Next: Current Ratio Formula & Example
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