How to Calculate Acid Test Ratio (Quick Ratio or Liquid Ratio)

Acid Test Ratio Calculator
Liquid Assets:
Cash & Cash Equivalents $
Accounts Receivable $
Short-Term Investments $
Other Liquid Assets $
Liquid Liabilities:
Accounts Payable $
Income Tax Payable $
Short-Term Loans $
Accrued Expenses $

The Acid Test Ratio, also known as Quick Ratio or Liquid Ratio, is a measure of how easily a business can pay money that it owes in the near future. The ATR is expressed as the ratio of a company's liquid assets to its liquid liabilities. For example, if a company has a Quick Ratio of 0.73:1, it means that it can pay only $0.73 for every $1 that it owes to its creditors and other agents. If a business has a ratio of 2.14:1, it means that it has $2.14 to cover every $1 that it owes.

A ratio of 1:1 is considered acceptable. Ratios lower than 1:1 mean that as business does not have enough liquid assets to cover its liabilities, while ratios higher than 1:1 mean that a business is in good shape financial-wise.

The Liquid Ratio is calculated by dividing the total value of liquid assets by the total short-term liabilities. Liquid assets include cash, accounts receivable, short-term investments, and other assets that can be converted to cash quickly. It does not include inventory, since you cannot easily convert inventory into cash without taking a significant loss. Pre-paid assets are not included among the liquid assets.

A company's quick liabilities include accounts payable, future income tax due, short-term loans, and accrued expenses that have not yet been paid off. Accrued expenses can include any portion of a long-term loan that is due within a year.

Example: A company has $10,000 cash, $4,500 in receivables, $500 in marketable securities (short-term investments). It also owes $6,000 in income tax, $3,500 in accounts payable, and $1,500 in other expensees.

Its total in liquid assets is $15,000 and its total in liabilities is $11,000. Since 15000/11000 = 1.3636, the company's Quick Ratio is 1.36:1. This means it has enough reserves to pay off its immediate liabilities.

© Had2Know 2010

Difference Between Price Markup and Gross Profit Margin

Percent Change Formula

How to Compute PERT Estimation

How to Compute the Required Sample Size

How to Implement Six Sigma Principles in Your Small Business