Which statement about the quick ratio is correct?

Which statement about the quick ratio is correct?

• A. It excludes inventory from the numerator.
• B. It includes inventory in the numerator.
• C. It uses total assets in the numerator.
• D. It is identical to the current ratio.

Answer: (A)

The quick ratio measures immediate liquidity by using only the most liquid current assets in the numerator. It includes cash, marketable securities, and accounts receivable, while excluding inventory because inventory may not be quickly converted into cash at a reliable value. This distinction makes the quick ratio a stricter test of short-term ability to cover current liabilities. For example, if cash and receivables total 20, and inventory is 15 with current liabilities of 12, the quick ratio is 20/12 = 1.67, whereas the current ratio would use 35/12 = 2.92, showing how inventory inflates the broader measure. Hence, the statement that the quick ratio excludes inventory from the numerator is the correct description.

The quick ratio measures immediate liquidity by using only the most liquid current assets in the numerator. It includes cash, marketable securities, and accounts receivable, while excluding inventory because inventory may not be quickly converted into cash at a reliable value. This distinction makes the quick ratio a stricter test of short-term ability to cover current liabilities. For example, if cash and receivables total 20, and inventory is 15 with current liabilities of 12, the quick ratio is 20/12 = 1.67, whereas the current ratio would use 35/12 = 2.92, showing how inventory inflates the broader measure. Hence, the statement that the quick ratio excludes inventory from the numerator is the correct description.