stringent test of liquidity; also called quick ratio. The ratio is found by dividing the most liquid current assets (cash, marketable securities, and accounts receivable) by current liabilities. (Notice that some current assets are not in the numerator: Inventory is not included because it usually takes a long time to convert into cash; prepaid expenses are left out because they cannot be turned into cash and thus are ncapable of covering current liabilities.) In general, the ratio should at least be equal to 1. In other words, for every $1 in current debt there should be $1 in quick assets. Assume cash is $100, marketable securities are $400, accounts receivable are $800, inventory is $3000, and current liabilities are $1000. The acid test ratio equals:
| Quick Assets Current Liabilities | = | $1300 $1000 | = | 1.3 |
The acid test ratio for the current year should be compared to prior years to evaluate the trend. It should also be compared to the acid test ratio of a competing company to get a relative comparison.
