Regarding the quick ratio, which statement is correct?

Regarding the quick ratio, which statement is correct?

• A. It includes inventory in quick assets
• B. It excludes inventory from quick assets
• C. It uses total assets instead of current assets
• D. It equals current assets divided by current liabilities

Answer: (B)

The quick ratio measures liquidity by focusing on the most liquid current assets—the cash, marketable securities, and accounts receivable—because inventory may not be quickly converted to cash. So inventory is excluded from quick assets in the numerator. The formula is quick assets divided by current liabilities, i.e., (current assets minus inventory) / current liabilities. This captures true short-term solvency without relying on selling inventory. If inventory were included, it would overstate liquidity; using total assets or using current assets without subtracting inventory would point to a different measure (the current ratio).

The quick ratio measures liquidity by focusing on the most liquid current assets—the cash, marketable securities, and accounts receivable—because inventory may not be quickly converted to cash. So inventory is excluded from quick assets in the numerator. The formula is quick assets divided by current liabilities, i.e., (current assets minus inventory) / current liabilities. This captures true short-term solvency without relying on selling inventory. If inventory were included, it would overstate liquidity; using total assets or using current assets without subtracting inventory would point to a different measure (the current ratio).