- Acid Test Ratio:
- What does Acid Test Ratio mean?
- The acid-test ratio is an indicator of a firm’s sufficient short-term assets to cover its immediate liabilities. This is more reliable than the current ratio since it ignores illiquid assets such as inventory.
Acid Test Ratio = `(c + a + i) / l`
- c = cash
- a = accounts receivable
- i = short term investments
- l = current liabilities
Below is a company's balance sheet, for the fiscal year ended October 30, 2017, by it the acid-test ratio can be calculated.
Cash equivalents $20,289 Accounts receivable $17,874 Vendor non-trade receivables $17,799 Short-term marketable securities $53,892 Inventories $4,855 Other assets(current) $13,936 Total assets(current) $128,645 Accounts payable $49,049 Accrued expenses $25,744 Deferred revenue $7,548 Commercial paper $11,977 Current portion of long-term debt $6,496 Total liabilities(current) $100,814
According to the formula, we can divide current liquid current assets by total current liabilities:-
- `(c + a + i) / l`
- `(20289 + 35673 + 53892) / 100814`
- `(55962 + 53892) / 100814`
- `109854 / 100814`
- Acid Test Ratio = `1.0897 : 1`
- Oct 24, 2018
- Calculation formula breakdown and table
- May 22, 2018
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