The acid-test ratio is based on a more conservative measure than the current ratio of the company's ability to liquidate more.
What is Acid - Test Ratio?
- The fast ratio, also referred to as the acid-test ratio, examines information from a company's balance sheet to determine whether it has enough short-term assets to pay its short-term liabilities.
- The acid-test, also known as the quick ratio, determines if a corporation has enough cash on hand to cover its immediate liabilities, such as short-term debt, by comparing its most short-term assets to its most short-term liabilities.
- Current assets that are difficult to dispose rapidly, such inventory, are disregarded by the acid-test ratio.
- If a corporation has current liabilities that are due but cannot be paid immediately, or accounts receivable that take longer than usual to be collected, the acid-test ratio may not be a good indicator of the firm's financial health.
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