Which formula correctly defines the quick ratio?

Which formula correctly defines the quick ratio?

• A. (Cash + marketable securities + receivables) / current liabilities
• B. Current assets / current liabilities
• C. (Cash + marketable securities) / accounts payable
• D. (Cash + receivables) / current liabilities

Answer: (A)

The quick ratio measures a firm’s ability to cover its short-term obligations using assets that can be quickly turned into cash. To reflect this, the numerator should include only cash equivalents and other assets that are highly liquid: cash, marketable securities, and accounts receivable. The denominator is current liabilities, obligations due within a year. Therefore, the formula (cash + marketable securities + receivables) / current liabilities captures the essence of quick liquidity, excluding inventory which may take longer to convert to cash. The other options don’t fit because they either include all current assets (which is the current ratio, not the quick ratio), omit liquid receivables, or use a different pair of assets or a different denominator.

The quick ratio measures a firm’s ability to cover its short-term obligations using assets that can be quickly turned into cash. To reflect this, the numerator should include only cash equivalents and other assets that are highly liquid: cash, marketable securities, and accounts receivable. The denominator is current liabilities, obligations due within a year.

Therefore, the formula (cash + marketable securities + receivables) / current liabilities captures the essence of quick liquidity, excluding inventory which may take longer to convert to cash.

The other options don’t fit because they either include all current assets (which is the current ratio, not the quick ratio), omit liquid receivables, or use a different pair of assets or a different denominator.