What is the quick ratio, and why is it a better liquidity measure than the current ratio in some cases?

• A. Quick ratio = (cash + marketable securities + accounts receivable) / current liabilities; excludes inventory.
• B. Quick ratio = current assets / current liabilities.
• C. Quick ratio = total assets / current liabilities.
• D. Quick ratio = cash / current liabilities.

Answer: (A)

The quick ratio measures short-term liquidity using only assets that can be turned into cash quickly. It is calculated as (cash + marketable securities + accounts receivable) divided by current liabilities. By excluding inventory, it provides a more conservative view of immediate liquidity, since inventory may not be sold promptly or could require markdowns. This makes the quick ratio particularly useful for lenders or in industries with slower-moving stock, where the current ratio might overstate how readily a company can cover its near-term obligations. The other formulations either include all current assets (which inflates liquidity when inventory is large) or use the wrong asset base (such as total assets or only cash), so they don’t reflect the near-term, readily available resources as accurately.