The acid test ratio is similar to the current ratio except that Inventory, Supplies, and Prepaid Expenses are excluded. In other words, the acid test ratio compares the total of the cash, temporary marketable securities, and accounts receivable to the amount of current liabilities.
Let's illustrate the acid test ratio by assuming that a company has cash of $7,000 + temporary marketable securities of $20,000 + accounts receivables of $93,000. This adds up to $120,000 of quick assets. If its current liabilities amount to $100,000 its acid test ratio is 1.2:1.
The larger the acid test ratio, the more easily will the company be able to meet its current obligations.
The acid test ratio is also known as the quick ratio.
