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Acid Test Ratio

The acid-test ratio is also known as the quick ratio and it conducts a more thorough test of a company’s ability to pay its short term debts by excluding inventory and prepaid expenses from the calculation. Thus, only quick assets are included in the calculation. The quick assets are cash, cash & equivalents, accounts receivable and notes receivable. Thus, the formula for acid-test ratio is:

Acid-test ratio = (Cash + Temporary Investments + Accounts Receivables) / Current Liabilities

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