What is quick ratio?
The Quick Ratio is a liquidity ratio used to assess the liquidity of an organization. This ratio is especially useful for organizations with inventories, since it ignores inventory and focuses on more liquid assets such as cash and equivalents, accounts receivable and marketable securities.
How to calculate quick ratio?
The quick ratio is calculated by dividing the total current assets (excluding inventories and prepaid expenses) by current liabilities. The higher the number obtained from this calculation, the better the organization’s financial position. A Quick Ratio of 1 or higher indicates that an entity has sufficient liquid assets to cover its short-term liabilities without selling any inventory or using other sources of financing.
Quick Ratio Formula
Q= (Current assets - inventories and prepaid expenses)/Current liabilities
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