Florida · Most missed · Episode 10

The Quick Ratio

2:03

The transcript is below. The full episode plays in the EstatePass CT dashboard.

Chapters

0:00The question
0:35Quick assets
0:51The math
1:10The answers
1:44Recap

In short

The quick ratio, or acid test, divides quick assets by current liabilities. Quick assets are cash, receivables and marketable securities; inventory stays out because it must be sold first. With cash of $76,000, receivables of $214,000 and securities of $30,000 against $400,000 of current liabilities, the quick ratio is $320,000 ÷ $400,000 = 0.80 to 1. Adding the $95,000 of inventory gives 1.04, the current ratio.

Quick assets: cash, receivables, marketable securities.
Inventory stays out of the quick ratio.
With inventory included, it is the current ratio.

Transcript

0:00The question

More than half the people who see this ratio question get it wrong. And most of them make the same mistake: one number too many. A contractor has cash, receivables, marketable securities, and inventory. 16 of 24 people missed it. 13 of them picked 1.04. Pause. What quick ratio should be used?

0:35Quick assets

The quick ratio counts only assets that turn into cash quickly. Cash, receivables, and marketable securities. Not inventory: it has to be sold first. That is why it is also called the acid test.

0:51The math

Add them up: 76,000, plus 214,000, plus 30,000 is $320,000. Divide by current liabilities of $400,000. The quick ratio is 0.80 to 1.

1:10The answers

Now the answers. D, 1.04: that adds the inventory back in. It is the current ratio. Out. A, 0.74, and B, 0.78: no standard ratio from these numbers gives either one. Out. That leaves C: 0.80 to 1. Quick ratio, leave the inventory out. Current ratio, put it in. Read which ratio the question asks for before you add anything.

1:44Recap

Cash, receivables and securities, over current liabilities. Inventory stays out. That is the last episode in this set. Subscribe so you catch the next one.

Sources

Florida Business & Finance bank question fl-bf-d-acct-prod-t01-003, worked

Independent study material. EstatePass is not affiliated with NASCLA, PSI, Pearson VUE, the Florida CILB or the CSLB, and nothing here is legal advice. Any jobs and companies in our episodes are fictional.