This glossary uses Visual Finance™ to bring financial terms to life. Each example shows data from the Round Number Company, a fictional business with simplified figures to make learning easier. For more details, visit 'How to Read Visual Finance'.
Acid-Test Ratio = Quick Assets/Current Liabilities
where Quick Assets = Cash + Receivables + Short-Term Investments
Example: The Round Number CompanyCash = 20; Accounts Receivable = 40; [STI} = 6; Current Liabilities = 36 Quick Assets = 20 + 40 + 6 = 66 ZATR = 66/36 = 1.8 |
The Acid-Test Ratio is a variant of the Current Ratio; it only includes items which are quickly (and easily) converted into cash. It is called ‘Acid-Test’ because it measures the ability to meet unexpected demands without depending on the sale of inventory.
A ratio of 1 is a good benchmark. Higher ratios indicate a satisfactory condition. Decreasing ratios indicate either a deteriorating cash position or a deteriorating demand for products.
Another definition of Quick Assets is: Current Assets less Inventories. This definition includes Prepaid Expenses but they are not always quickly converted to Cash.
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Calculator for Acid-Test Ratio Quick Assets = Cash + Receivables + Short-Term Investments
Quick Ratio = Quick Assets/Current Liabilities
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The above is our generic explanations of common corporate financial terminology. Actual meanings can vary widely from company to company; in order to have the correct internal definition you need to ask your Finance Department, "What do you mean by that?"
term list.