Definition of Current Ratio
The current ratio is the proportion, quotient, or relationship between the amount of a company's current assets and the amount of its current liabilities. The current ratio is calculated by dividing the amount of current assets by the amount of current liabilities.
Definition of Quick Ratio
The quick ratio (or the acid test ratio) is more conservative than the current ratio in that the amount in inventories, supplies, and prepaid expenses is not included. These current assets are excluded because it is assumed that they will not be turning to cash quickly.
The quick ratio is calculated by dividing the amount of "quick assets" by 2) the amount of current liabilities. The quick ratio assumes that only the following current assets are "quick assets":
- Cash equivalents
- Short-term marketable securities
- Accounts receivable
Difference between Current Ratio and Quick Ratio
To illustrate the difference between the current ratio and the quick ratio, assume that a company's balance sheet reports current assets of $60,000 and current liabilities of $40,000. Its current assets include $35,000 of inventory and $1,000 of supplies and prepaid expenses. These amounts result in the following:
- Current ratio is 1.5 to 1 (1.5:1, or simply 1.5). This is the result of dividing $60,000 by $40,000.
- Quick ratio is 0.6 to 1. This is the result of dividing $24,000 (which is $60,000 - $35,000 - $1,000) by $40,000.
AccountingCoach PRO has 24 blank forms to guide you in calculating and understanding financial ratios. Also included are 24 filled-in forms based on two financial statements.