What Is the Quick Ratio?
Formula, meaning, and a worked example of a stricter liquidity test.
Home › Accounting Glossary › Quick Ratio
| Also called | Acid-test ratio |
|---|---|
| Stricter than | Current ratio |
| Topic | Financial accounting · Liquidity |
Quick ratio in plain English
The current ratio counts everything the business expects to turn into cash within a year. The quick ratio is tougher: it ignores inventory, because selling stock takes time and may mean discounting it. It asks, “Could we pay our bills quickly if we had to?”
Worked example
Current assets are 60,000, including inventory of 20,000. Current liabilities are 40,000.
Quick ratio = (60,000 − 20,000) ÷ 40,000 = 1.0. The business has 1.00 of quick assets for every 1.00 owed in the short term.
- Forgetting to deduct inventory. Some versions also exclude prepaid expenses, so check your syllabus.
- Treating one ratio as proof of health. Compare with similar businesses and past results.
Frequently asked questions
What is a good quick ratio?
A ratio of around 1 or above is often seen as comfortable, but it varies by industry.
Why is inventory excluded?
Inventory is the least liquid current asset. It may be slow to sell or sell below cost.
What is the difference between the quick ratio and the current ratio?
The current ratio uses all current assets. The quick ratio excludes inventory, so it is a stricter test.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.