Quick Ratio: This ratio is also termed as “acid test ratio” or “liquidity ratio”. This ratio is ascertained by comparing the liquid assets (i.e., assets which are immediately convertible into cash without much loss) to current liabilities prepaid expenses and stock are not taken as liquid assets. The ratio may be expressed as:
Some accountants prefer the term “Liquid Liabilities” for “Current Liabilities” or the purpose of ascertaining this ratio. Liquid liabilities means liabilities which are payable within a short period. The bank over-draft (if it becomes a permenant mode of financing) & cash credit faculties will be excluded from current liabilities in such a case.
The ideal ratio is 1.
This ratio is also an indicator of short-term solvency of the company.
A comparison of the current ratio to quick ratio shall indicate the inventory hold-ups. For example if two units have the same current ratio but different liquidity ratio, it indicates over-stocking by the concern having low liquidity ratio as compared to the concern which has a higher liquidity ratio.
Thus, debtors are excluded from liquid assets for the purpose of comparing super – quick ratio. Current liabilities & liquid liabilities have the same meaning as explained above. The ratio is the more measure of firms’ liquidity position. However, it is not widely used in practice.
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