The Quick Ratio is defined as which formula?

The Quick Ratio is defined as which formula?

• A. [Inventory + Cash] / [CURRENT LIABILITIES]
• B. [CASH + A/R] / [CURRENT LIABILITIES]
• C. [CASH + A/R + Inventory] / [CURRENT LIABILITIES]
• D. [CASH] / [CURRENT LIABILITIES]

Answer: (D)

The Quick Ratio measures a company’s ability to meet current obligations using assets that can be quickly turned into cash, so inventory is not included. The usual formula is cash plus marketable securities plus accounts receivable, all divided by current liabilities. If marketable securities aren’t considered, it becomes (cash + accounts receivable) / current liabilities. Inventory is excluded precisely because it may not be readily converted to cash in the near term. Among the given options, the interpretation that aligns with this idea most closely is the one that includes cash and accounts receivable (and would also include marketable securities if present). The option with only cash in the numerator describes the cash ratio, which is a stricter liquidity measure and not the Quick Ratio. In standard practice, the Quick Ratio uses cash and receivables (and possibly marketable securities), not cash alone.

The Quick Ratio measures a company’s ability to meet current obligations using assets that can be quickly turned into cash, so inventory is not included. The usual formula is cash plus marketable securities plus accounts receivable, all divided by current liabilities. If marketable securities aren’t considered, it becomes (cash + accounts receivable) / current liabilities. Inventory is excluded precisely because it may not be readily converted to cash in the near term.

Among the given options, the interpretation that aligns with this idea most closely is the one that includes cash and accounts receivable (and would also include marketable securities if present). The option with only cash in the numerator describes the cash ratio, which is a stricter liquidity measure and not the Quick Ratio. In standard practice, the Quick Ratio uses cash and receivables (and possibly marketable securities), not cash alone.