The quick ratio is a pointer of an organization's transient liquidity position and measures an organization's capacity to meet its momentary commitments with its most liquid resources.
Since it shows the organization's capacity to immediately utilize its near cash assets (assets that can be exchanged easily as well as immediately for cash) to square away its present liabilities, it is likewise referred to as the acid test ratio.
An acid test is a quick test intended to produce immediate outcomes—subsequently, the name.
The quick ratio quantifies the cash measure of liquid assets accessible against the cash measure of present liabilities of an organization.
Liquid assets can be defined as the assets that can be easily as well as immediately exchanged for cash with negligible effect on the price received in the open market, while present liabilities are an organization's obligations or commitments that are expected to be paid to lenders within a year.
The formula to calculate the quick ratio is:
QR = ( CE + MS + AR ) / CL
QR = ( CA − I − PE ) / CL
QR = Quick ratio
CE = Cash & equivalents
MS = Marketable securities
AR = Accounts receivable
CL = Current Liabilities
CA = Current Assets
I = Inventory
PE = Prepaid expenses