Quick Ratio Formula

Quick Ratio Formula

Quick Ratio =   Current Asset -Stock   .                             Current Liabilities

 Quick Ratio Formula Example

Stock in Hand = 30,000

Closing Debtor= 20,000

Cash = 20,000

Closing Creditor= 40,000

Calculate Current Ratio of the company

Solution

Current asset

Stock = 30,000

Debtor= 20,000

Cash =   20,000

            70,000

Quick Ratio =   Current Asset-Stock   

                        Current Liabilities

=(70,000-30,000)/40,000

=40,000/30000

=1:1

Significance of Quick Ratio

Quick ratio tells about the liquidity situation of the company. This ratio is more representative of liquidity position than current ratio, because only liquid asset are included. (Stock is excluded)

Reasons for Exclusion Stock

Stock is regarded as less liquid asset, selling of stock is not certain and  may require or take more time for conversion into liquid asset (cash). Therefore stock is excluded from the current asset for the purpose of calculating the quick ratio.

Other Name of Quick Ratio

Other name of quick ratio is acid test ratio. The term quick ratio and acid test ratio can be used interchangeably.

Ideal Quick Ratio

Quick ratio should be at equal to 1 or more. It means that quick financing should be available to pay immediate liabilities. Quick ratio will vary industry to industry, for some industries quick ratio ranging from 1 to 1.5 ratio may be considered sufficient. For other industries such ratio may be in range of 2 to 3. we can safely say that ideal quick ratio should lie between 1 to 2.

Reasons for High Quick Ratio

High or growing quick ratio indicates those receivables are being chased more aggressively. High quick ratio also indicates growth in the sales. Other reason for high quick ratio may be delayed payment to creditors.

Quick ratio is expected to rise due to early receipt from the debtor, similarly sales growth would also improve the liquidity (cash). late or delayed payment would improve the quick ratio or liquidity of the company.

Reasons for Low Quick Ratio

Reasons for low quick ratio include low performance of collection department. The other obvious reason may be decline is sales or sales growth. One of the main reasons for low or declining quick ratio is early payment to creditors.