Which item is excluded from the Quick Ratio calculation?

Which item is excluded from the Quick Ratio calculation?

• A. Current Liabilities
• B. Inventory
• C. Accounts Receivable
• D. Cash

Answer: (B)

Inventory is excluded from the Quick Ratio because this measure focuses on the most liquid current assets that can be quickly converted into cash. The Quick Ratio, or acid-test ratio, uses only cash, cash equivalents, marketable securities, and accounts receivable in the numerator, divided by current liabilities. Inventory isn’t included since converting it to cash rapidly is uncertain and often requires discounting or time to sell, making it less reliable for assessing short-term liquidity. Current liabilities remain in the denominator to show how well the firm can cover its obligations with truly liquid assets. Cash and accounts receivable are included because they represent cash that can be obtained soon. For example, with cash and receivables totaling 90 and liabilities 60, the quick ratio would be 1.5; including inventory would overstate liquidity.

Inventory is excluded from the Quick Ratio because this measure focuses on the most liquid current assets that can be quickly converted into cash. The Quick Ratio, or acid-test ratio, uses only cash, cash equivalents, marketable securities, and accounts receivable in the numerator, divided by current liabilities. Inventory isn’t included since converting it to cash rapidly is uncertain and often requires discounting or time to sell, making it less reliable for assessing short-term liquidity. Current liabilities remain in the denominator to show how well the firm can cover its obligations with truly liquid assets. Cash and accounts receivable are included because they represent cash that can be obtained soon. For example, with cash and receivables totaling 90 and liabilities 60, the quick ratio would be 1.5; including inventory would overstate liquidity.