Liquid ratio

	ARTICLE-74
It is also known as Quick Ratio or Acid Test ratio. This ratio is nothing but the same current ratio with minor change.  It establishes the relationship between quick assets and current liabilities. Quick asset means current assets deducted by stock (inventory) and pre paid expenses. Thus, quick asset means assets, which are readily convertible into cash. A rupee of cash is more readily available to meet current obligations than a rupee of, say inventory. The reason for exclusion of ·         Inventory is that it is not easily or readily convertible into cash. ·         Pre paid expenses naturally not available for pay off current debts. The Acid Test ratio is a measure of liquidity designed to overcome this defect of the current ratio. This ratio is referred to as quick ratio, because it gives the firm’s ability to convert its current assets quickly into cash in order to meet its current liabilities.
Quick ratio can be obtained by dividing quick assets (Current assets-inventory and pre paid expenses) by current liabilities.
Generally, a quick ratio of 1:1 is considered to be satisfactory, because it taken into account only liquid asset whose realizable value is almost certain.
·         A higher ratio may indicate the excess utilization of only liquid assets. It shows the inefficiency of management.
·         A lower ratio may threaten the liquidity position of the business.
This ratio is a more rigorous and penetrating test of the liquidity position of a business than current ratio. But it is not conclusive. Both current ratio and quick ratio should be considered in relation to the industry average to infer the short term financial position, whether it is satisfactory or not.