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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Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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