NASAA Series 65, Uniform Investment Adviser Law ExaminationEconomic Factors and Business InformationMedium
A company's balance sheet shows Current Assets of $150,000, Inventory of $40,000, and Current Liabilities of $100,000. What is the company's Quick Ratio (Acid-Test Ratio)?
- A1.9 : 1
- B0.67 : 1
- C1.5 : 1
- D1.1 : 1
Show answer & explanationAnswer & explanation
Correct answer: D. 1.1 : 1
The Quick Ratio is calculated as (Current Assets - Inventory) / Current Liabilities. So, ($150,000 - $40,000) / $100,000 = $110,000 / $100,000 = 1.1 : 1.
Why the other options are wrong
- A. This would be (Current Assets + Inventory) / Current Liabilities, which is incorrect.
- B. This is the inverse of the current ratio (Current Liabilities / Current Assets).
- C. This is the current ratio (Current Assets / Current Liabilities).
Quick Ratio (Acid-Test Ratio)
A liquidity ratio that measures a company's ability to meet its short-term obligations with its most liquid assets, excluding inventory.
- Formula: (Current Assets - Inventory) / Current Liabilities.
- Considered a more conservative measure of liquidity than the current ratio.
- A higher ratio generally indicates better short-term liquidity.
Memory trick: How quickly can a company turn assets into cash to pay bills?