Key measure of a firm’s liquidity, it answers the question :
” Can this firm meet its current obligations from its liquid assets if suddenly all sales stop? ”
This ratio is more stringent than ‘ current ratio ‘, its exclude inventories to concentrate on the more liquid assets of the firm. Usually an acid test ratio of 1.0 or higher is considered satisfactory by lenders and investors. This ratio is also known as acid ratio and quick ratio.
Formula for Calculating Acid Test Ratio is
Acid Test Ratio = ( Current Assets – Inventory Value ) / Current Liabilities