What is Quick Ratio ?
It is the ratio of quick (or liquid) asset to current liabilities. Quick Ratio is also called Liquid Ratio.
What is the formula of Quick Ratio ?
Formula for Quick ratio = Quick Assets / Current Liabilities
What is Quick Assets?
Quick assets are defined as those assets which are quickly convertible into cash.
What is Excluded from Current Assets to reach Quick Assets?
While Calculating Quick assets we exclude the inventories at the end and other current assets such as prepaid expenses, advance tax, etc., from the current assets.
Because of exclusion of non-liquid current assets it is considered better than current ratio as a measure of liquidity position of the business.
Why is Quick Ratio also called Acid-Test Ratio ?
It is calculated to serve as a supplementary check on liquidity position of the business and is therefore, also known as ‘Acid-Test Ratio’.
What is the Significance of Quick Ratio?
Significance: The ratio provides a measure of the capacity of the business to meet its short-term obligations without any flaw, low ratio will be very risky and a high
ratio suggests unnecessarily deployment of resources in otherwise less profitable short-term investments.
What is the ideal ratio of Quick Ratio?
Ideal Ratio of Quick ratio is 1:1.
Liquid ratio is also known as which ratio?
a) Quick ratio
b)Working capital ratio
c) Acid test ratio
d) Stock turnover ratio
a) A and B
b) A and C
c) B and C
d) C and D
ANSWER: b) A and C
The ideal level of liquid ratio is?
a) 1:1
b) 2:1
c) 1.5:1
d) All of the above
ANSWER: a) 1:1
Liquid assets is determined by
a) Current assets-stock-Prepaid expenses
b) Current assets +stock+ prepaid expenses
c) Current assets +Prepaid expenses
d) None of the above
ANSWER: a) Current assets-stock-Prepaid expenses
Frequently Asked Questions:
Excessive Current Liabilities causes quick ratio to decrease, Quick ratio depends on ratio of Quick asset and Current Liabilities. When quick asset with a company ie. assets such as cash or cash equivalents is less as compared to current liabilities Quick Ratio decreases, but when Current Liabilities increases very much as compared to company capacity to pay through quick asset is less then also Quick Ratio decreases.