Acid Test Ratio Law and Legal Definition
Acid test ratio refers to a measure of a company's ability to pay current debts from its most liquid, or quick, assets. It is the ratio of current assets minus inventories to total current liabilities. It is calculated by dividing the sum of cash, accounts receivable, and marketable securities by current liabilities.
The acid test ratio is a measure of liquidity. It is a strict test of the corporation's liquidity. The formula is: current assets (without including inventory) divided by the current liabilities. When examining a company's financial statements, the acid test ratio can be calculated by adding up what they list for cash, cash equivalents, accounts receivables, and marketable securities and then divided the total by their current liabilities.
The ratio is used to allow creditors to assess how well a company is able to meet short-term obligations by selling its liquid assets. It is also called quick ratio.
