Which formula defines the quick ratio?

Which formula defines the quick ratio?

• A. (Current assets minus Inventory) / Current liabilities
• B. Current assets / Current liabilities
• C. (Current assets minus Inventory) / (Current liabilities minus Short-term debt)
• D. (Cash plus Marketable securities) / Current liabilities

Answer: (A)

The quick ratio measures a company’s ability to meet short-term obligations using assets that can be quickly turned into cash, excluding inventory. That makes it a stricter test of liquidity than the broad current ratio, which includes all current assets. The correct formula subtracts inventory from current assets and then divides by current liabilities. This reflects reliance on highly liquid assets like cash, marketable securities, and receivables, while removing inventory that may not be readily sellable in the near term. Why the other forms aren’t the quick ratio: using all current assets in the numerator includes inventory, giving a looser picture of liquidity. A version that subtracts something from the liabilities in the denominator isn’t the standard quick ratio. Using only cash and marketable securities in the numerator is the cash ratio, which is more conservative than the quick ratio.

The quick ratio measures a company’s ability to meet short-term obligations using assets that can be quickly turned into cash, excluding inventory. That makes it a stricter test of liquidity than the broad current ratio, which includes all current assets.

The correct formula subtracts inventory from current assets and then divides by current liabilities. This reflects reliance on highly liquid assets like cash, marketable securities, and receivables, while removing inventory that may not be readily sellable in the near term.

Why the other forms aren’t the quick ratio: using all current assets in the numerator includes inventory, giving a looser picture of liquidity. A version that subtracts something from the liabilities in the denominator isn’t the standard quick ratio. Using only cash and marketable securities in the numerator is the cash ratio, which is more conservative than the quick ratio.