- Finan accounting ratio used to measure an organization’s liquidity. The most common expression of the ratio is:(Current assets – Inventory) / Current liabilities = Acid-test ratioIf, 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 = 1.44A 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 ratioIf, 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 = 1.25In 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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acid test ratio — / æsɪd test reɪʃɪəυ/ noun same as liquidity ratio … Dictionary of banking and finance
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acid-test ratio — See: liquid ratio … Accounting dictionary
acid-test ratio — See liquid ratio … Big dictionary of business and management
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