Definition
The quick ratio divides the most liquid current assets by current liabilities. The usual numerator is cash and cash equivalents, marketable securities, and net trade receivables. Inventory and prepaid expenses are excluded because they are not readily turned into cash to meet obligations. Some analysts instead subtract inventory and prepaids from total current assets, so the two versions can differ slightly.
Why it matters in an audit or review
The ratio is stricter than the current ratio and shows whether liquidity depends on selling inventory. A wide gap between the two ratios invites questions about inventory valuation and obsolescence. Because receivables dominate the numerator, an inflated receivable balance or a thin allowance makes the ratio look healthier than it is.
Example
Illustrative: cash of $150,000, marketable securities of $50,000 and net receivables of $400,000 total $600,000. With current liabilities of $800,000 the quick ratio is 0.75. If the current ratio is 1.56, most of the difference is inventory and prepaids.
Common mistakes
- Using gross receivables instead of receivables net of the allowance.
- Mixing the two numerator definitions between years.
Sources
- AICPA, AU-C Section 520, Analytical Procedures (analytical procedures as evaluations of plausible relationships among financial data)
- FASB ASC 210-10, Balance Sheet, Overall (current assets)
- SEC, Regulation S-X Rule 5-02, Balance sheets (17 CFR 210.5-02, ecfr.gov)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error