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Interpretation of financial statements

5.2 The quick ratio

The quick ratio is also known as the acid test ratio. It eliminates inventory from
current assets and so provides the acid test of whether the entity has sufficient liquid
resources (receivables and cash) to settle its short-term liabilities.

The quick ratio is calculated as follows:

Current assets – inventory
= :1
Current liabilities

Tutor notes guidance – discussion points

Discuss with students possible explanations for changes in the quick ratio.

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