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LSDefine
Simple English definitions for legal terms
quick ratio
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A quick definition of quick ratio:
The quick ratio, also known as the acid-test ratio, is a measure of a company's ability to pay off its short-term debts using its most liquid assets, such as cash and accounts receivable. It is calculated by dividing the total quick assets by the total current liabilities. This ratio is important because it shows how well a company can meet its financial obligations without having to sell off its long-term assets.
A more thorough explanation:
The quick ratio, also known as the quick-asset ratio or acid-test ratio, is a financial ratio that measures a company's ability to pay off its current liabilities with its most liquid assets. These assets include cash, marketable securities, and accounts receivable.
Quick Ratio = (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities
Let's say Company A has $100,000 in current assets, $20,000 in inventory, and $5,000 in prepaid expenses. Its current liabilities are $50,000. To calculate the quick ratio, we would subtract the inventory and prepaid expenses from the current assets:
Quick Ratio = ($100,000 - $20,000 - $5,000) / $50,000 = 1.5
This means that Company A has $1.50 in liquid assets for every $1 of current liabilities. A quick ratio of 1 or higher is generally considered good, as it indicates that the company can meet its short-term obligations without having to sell off its inventory or other assets.