How to Calculate Quick Ratio

Quick ratio (also known as Liquid ratio or Acid-test ratio) is a measure of a company's ability to meet its obligations. To calculate the ratio, you subtract Current Assets from Inventory, and then divide that figure by Current Liabilities.

Learn how to calculate the quick ratio with the following example:

Below are the data from Golden Ltd. as at 31 December 2010:
Cash in hand $100,000
Accounts payable $50,000
Accounts receivable $60,000
Bank $70,000
Inventory $30,000
Accrued expenses $15,000
Corporation tax due $80,000
Dividends proposed $40,000

Then,
Current Assets = Cash in hand + Accounts receivable + Bank + Inventory = 100,000 + 60,000 + 70,000 + 30,000 = $260,000
Current Liabilities = Accounts payable + Accrued expenses + Corporation tax due + Dividends proposed = 50,000 + 15,000 + 80,000 + 40,000 = $185,000
Quick ratio = (Current Assets - Inventory) / Current Liabilities = (260,000 - 30,000) / 185,000 = 1.24
This means that the company can pay current liabilities 1.24 times with its liquid assets.

* Next: How to Calculate Current Ratio