Which of the following is NOT used to calculate the acid-test ratio?

Which of the following is NOT used to calculate the acid-test ratio?

– inventory

– current liabilities

– cash

– net current receivables

Answer: – inventory

Thus, the acid-test ratio, sometimes referred to as the quick ratio, evaluates whether the company possesses adequate short-term resources with which to pay short-term creditors while not having to sell inventory. The rationale for using this ratio is that the inventory is not charged since it is part of option 1. The acid-test ratio is determined by the formula money, marked securities, and net current receivables divided by current liabilities. Excess inventory is subtracted saying that it is less liquid than the other current assets and may take some time to turn into cash. The advantage of the acid-test ratio over the current ratio is that the acid test does not include inventory and thus offers a much more stringent picture of a firm’s liquidity. This makes it especially relevant for certain industries where inventory could be less easily sold off or for creditors needing to know a company’s ability to pay its near-term debts.