Quick Ratio Template
This quick ratio template helps you calculate the quick ratio given the amount of cash, marketable securities, accounts receivable, and accounts payable.
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The Quick Ratio, also known as the Acid-test or liquidity ratio, measures the ability of a business to pay its short-term liabilities by having assets that are readily convertible into cashCash EquivalentsCash and cash equivalents are the most liquid of all assets on the balance sheet. Cash equivalents include money market securities, Bankers Acceptances, Treasury bills, commercial paper, and other money market instruments.. These assets are, namely, cash, marketable securitiesMarketable SecuritiesMarketable securities are unrestricted short-term financial instruments that are issued either for equity securities or for debt securities of a publicly listed company. The issuing company creates these instruments for the express purpose of raising funds to further finance business activities and expansion., and accounts receivableAccounts ReceivableAccounts Receivable (AR) represents the credit sales of a business, which are not yet fully paid by its customers, a current asset on the balance sheet. Companies allow their clients to pay at a reasonable, extended period of time, provided that the terms are agreed upon.. These assets are known as “quick” assets since they can quickly be converted into cash.
The Quick Ratio Formula
Quick Ratio = (Cash & equivalents + marketable securities + accounts receivable) / Current liabilities
Or, alternatively,
Quick Ratio = (Current Assets – Inventory – Prepaid expenses) / Current Liabilities
Generally speaking, the ratio includes all current assetsCurrent AssetsCurrent assets are all assets that can be reasonably converted to cash within one year. They are commonly used to measure the liquidity of a company., except:
- Prepaid expenses – because they can not be used to pay other liabilities
- Inventory – because it may take too long to convert inventory to cash to cover pressing liabilities
As you can see, the ratio is clearly designed to assess companies where short-term liquidity is an important factor, and hence it is commonly referred to as the Acid Test.
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