The quick ratio is calculated by subtracting current assets minus inventory and dividing the result by current liabilities.
The quick ratio determines whether a company has enough liquid assets to cover its short-term obligations. A quick ratio of 1.0 indicates that a company's liquid assets exactly cover its liabilities. A quick ratio of less than 1.0 indicates that a company's liquid assets are insufficient to cover its liabilities. A quick ratio greater than 1.0 indicates that a company has more liquid assets than is required to cover its liabilities.
Assume a business has $10,000 in cash, $5,000 in accounts receivable, $2,000 in inventory, and $8,000 in current liabilities. The quick ratio for the company would be ($10,000-$2,000)/$8,000, or 1.0.
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