How do the current and acid-test (quick) ratios differ as far as their formulas and what does each one measure?
The current ratio is computed as follows:
Current ratio = Current assets ¸ Current liabilities
whereas the quick (or acid-test) ratio is computed as follows:
Quick ratio = Quick assets ¸ Current liabilities
where "quick assets" are current assets minus the inventory and prepaid accounts.
Both ratios measure liquidity. Liquidity is a company's ability to pay its short-term obligations as they become due. The formulas differ in that the quick ratio is a stricter, more conservative, test of a company's ability to pay its short-term obligations. Therefore, one would expect the quick ratio to be smaller than the current ratio.
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