The difference between the current ratio and the acid test ratio (or quick ratio) mainly involves the current assets *inventory* and *prepaid expenses*.

## Definition of Current Ratio

The current ratio uses *all of the current assets* and divides their total by the total amount of current liabilities.

## Definition of Acid Test Ratio

The acid test ratio uses *only the following current assets* (which are considered to be the "quick assets") and divides their total by the total amount of current liabilities:

- Cash and cash equivalents
- Short-term marketable securities
- Accounts receivable (net of the allowance for uncollectible accounts)

Notice that inventory (which is a significant current asset for retailers and manufacturers) and prepaid expenses are not included in the list of quick assets and therefore are not included in the acid test ratio.

## Example of Current Ratio and Acid Test Ratio

To illustrate the difference between the current ratio and the acid test ratio, let's assume that a company has the following:

- Current liabilities $50,000
- Cash and cash equivalents $5,000
- Short-term marketable securities $10,000
- Accounts receivable, net $25,000
- Inventory $56,000
- Prepaid expenses $4,000

The *current ratio is 2 or 2:1* (total current assets of $100,000 divided by the total current liabilities of $50,000).

The *acid test ratio is 0.8 or 0.8:1* (quick assets of $40,000 ($5,000 + $10,000 + $25,000) divided by the total current liabilities of $50,000.