CFA Level IFinancial Statement AnalysisMedium
A firm reports the following: cash $50,000; marketable securities $20,000; accounts receivable $30,000; inventory $100,000; prepaid expenses $10,000; and current liabilities of $100,000. What is the firm's quick ratio?
- A1.00
- B2.10
- C0.80
- D0.50
Show answer & explanationAnswer & explanation
Correct answer: A. 1.00
Quick assets exclude inventory and prepaid expenses: 50,000 + 20,000 + 30,000 = $100,000. Quick ratio = 100,000 / 100,000 = 1.00.
Why the other options are wrong
- B. Incorrect — this equals the current ratio (including inventory and prepaids), not the quick ratio.
- C. Incorrect — this incorrectly includes only part of quick assets.
- D. Incorrect — this understates quick assets, possibly omitting receivables.
Quick Ratio (Acid-Test Ratio)
A liquidity ratio measuring a firm's ability to meet short-term obligations using its most liquid assets, excluding inventory and prepaid expenses.
- Quick assets = cash + marketable securities + receivables
- Formula: Quick assets / Current liabilities
- More conservative than the current ratio
Memory trick: Quick assets are cash-like — no inventory allowed