NASAA Series 66 Uniform Combined State Law ExaminationEconomic Factors and Business InformationMedium
A portfolio manager is analyzing a company's financial statements and notes that its current assets are $150 million and current liabilities are $100 million. The company's inventory is $60 million. What is the company's Quick Ratio (Acid-Test Ratio)?
- A0.9x
- B2.1x
- C1.5x
- D1.0x
Show answer & explanationAnswer & explanation
Correct answer: A. 0.9x
The Quick Ratio (Acid-Test Ratio) is calculated as (Current Assets - Inventory) / Current Liabilities. In this case, Quick Ratio = ($150 million - $60 million) / $100 million = $90 million / $100 million = 0.9x.
Why the other options are wrong
- B. Incorrect. This is a miscalculation.
- C. Incorrect. This is the Current Ratio (Current Assets / Current Liabilities = $150M / $100M = 1.5x).
- D. Incorrect. This would imply Current Assets - Inventory equals 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.
- More conservative than the Current Ratio.
- A ratio of 1.0 or higher is generally considered healthy.
Memory trick: Quick Ratio: Quick Cash, No Inventory Stash.