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What is the difference between the current ratio and the quick ratio?

The current ratio is the proportion (or quotient or fraction) of the amount of current assets divided by the amount of current liabilities.

The quick ratio (or the acid test ratio) is the proportion of 1) only the most liquid current assets to 2) the amount of current liabilities. In other words, the quick ratio assumes that only the following current assets will turn to cash quickly: cash, cash equivalents, short-term marketable securities, and accounts receivable. Hence, the quick ratio does not include inventories, supplies, and prepaid expenses.

To illustrate the difference between the current ratio and the quick ratio, let's 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. The company's current ratio is 1.5 to 1 [$60,000 divided by $40,000]. Its quick ratio is 0.6 to 1 [($60,000 minus $36,000) divided 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.