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# acid-test ratio

Fin
an accounting ratio used to measure an organization’s liquidity. The most common expression of the ratio is:
(Current assets – Inventory) / Current liabilities = Acid-test ratio
If, for example, current assets total \$7,700, inventory amounts to \$1,200 and current liabilities total \$4,500, then:
(7,700 – 1,200) / 4,500 = 1.44
A variation of this formula ignores inventories altogether, distinguishes assets as cash, receivables, and short-term investments, then divides the sum of the three by the total current liabilities, or:
Cash + Accounts receivable + Short-term investments/Current liabilities = Acid-test ratio
If, for example, cash totals \$2,000, receivables total \$3,000, short-term investments total \$1,000, and liabilities total \$4,800, then:
(2,000 + 3,000 + 1,000) / 4,800 = 1.25
In general, the ratio should be 1:1 or better. It means a company has a unit’s worth of easily convertible assets for each unit of its current liabilities.

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