Acid Test Ratio Formula Calculator

Acid Test Ratio Formula:

\[ \text{Acid Test Ratio} = \frac{\text{Cash} + \text{Receivables} + \text{Short-term Investments}}{\text{Current Liabilities}} \]

Cash:

Receivables:

Short-term Investments:

Current Liabilities:

Acid Test Ratio:

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1. What is the Acid Test Ratio Formula?

The Acid Test Ratio, also known as the Quick Ratio, measures a company's ability to meet its short-term obligations with its most liquid assets. It provides a more stringent assessment of liquidity than the current ratio by excluding inventory from current assets.

2. How Does the Calculator Work?

The calculator uses the Acid Test Ratio formula:

\[ \text{Acid Test Ratio} = \frac{\text{Cash} + \text{Receivables} + \text{Short-term Investments}}{\text{Current Liabilities}} \]

Where:

Cash — Currency and cash equivalents
Receivables — Accounts receivable and other short-term receivables
Short-term Investments — Marketable securities and other liquid investments
Current Liabilities — Obligations due within one year

Explanation: The ratio indicates how well a company can pay off its current liabilities without relying on the sale of inventory or other less liquid assets.

3. Importance of Acid Test Ratio Calculation

Details: The acid test ratio is a key financial metric used by creditors, investors, and analysts to assess a company's short-term liquidity position and financial health.

4. Using the Calculator

Tips: Enter all currency values in the same denomination (dollars). Current liabilities must be greater than zero for a valid calculation.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good acid test ratio?
A: Generally, a ratio of 1:1 or higher is considered good, indicating the company has enough liquid assets to cover its current liabilities.

Q2: How does acid test ratio differ from current ratio?
A: The acid test ratio excludes inventory from current assets, providing a more conservative measure of liquidity.

Q3: Why exclude inventory from the calculation?
A: Inventory is excluded because it may not be easily convertible to cash in the short term and its value can be uncertain.

Q4: What industries might have different acid test ratio standards?
A: Service industries with minimal inventory may have lower acceptable ratios, while manufacturing companies might require higher ratios.

Q5: Can the acid test ratio be too high?
A: Yes, an excessively high ratio may indicate that the company is not effectively using its liquid assets for growth or investment opportunities.