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ACID-TEST RATIO

AJEY KARTHIK J P
1502011

CONCEPT
A severe test of a businesss solvency (its capability to

pay the liabilities that will come due in the short term)
than thecurrent ratio
Excludes inventory and prepaid expenses, which the
current ratio includes, and it limits assets to cash and
items that the business can quickly convert to cash
Cash, cash equivalents, short-term investments or
marketable securities, and current accounts receivable
are considered quick assets
Quick assets are current assets that can be converted
to cash within 90 days or in the short-term
Quick ratio or Pounce ratio - where a pack of wolves
(known ascreditors) could pounce on the business and
demand quick payment of the businesss liabilities

Higher the ratio, more financially secure a company in

shortterm.
Eg: Fast food giants- Expand at a very fast pace,
investment needs
Alternatively, a company may have a lower quick ratio
due to better credit terms with suppliers than the
competitors
Eg: Retail industry- Stable business environment,
favorable credit terms with suppliers.
Drawbacks:
no information about the level and timing of cash
flows
Assumes accounts receivableare readily available for
collection, which may not be the case for many
companies

RETAIL BALANCE SHEET

0.17
5

HEAVY ENGINEERING BALANCE


SHEET

0.13
6

TELECOM BALANCE SHEET

0.2
0

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