Which of the following is true about the quick ratio?

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

Answer: (C)

The quick ratio gauges short-term liquidity by focusing on assets that can be quickly converted to cash. Its numerator includes cash, marketable securities, and accounts receivable—assets that are usually readily usable to cover obligations. Inventory is excluded because turning it into cash can take time and may require discounts or additional steps, so it doesn’t reflect immediate liquidity. The denominator is current liabilities, giving a sense of how many dollars of quick assets are available to cover each dollar of short-term debt. This makes the quick ratio a stricter measure than the current ratio, which uses total current assets in the numerator. Therefore, the statement that the quick ratio excludes inventory from its calculation is the true one, and it is calculated as quick assets divided by current liabilities.