ACCA FM Syllabus C. Working Capital Management - acid test - Notes ^{3 / 7}

Not every company can quickly convert its Inventory into cash in the event it had to pay all its current liabilities. 

 Therefore, the Quick Ratio is a tougher way to test the company’s ability to meet its current debt load.

You can make the test even tougher by also subtracting off the accounts receivable and prepaid expenses.  This will pretty much leave only the truly current and liquidable assets.

If a company you are analysing looks good while testing it against the Current Ratio, then the Quick Ratio should be your next test to apply.

Companies with steadily rising Inventories may look good with the Current Ratio, but will have a deteriorating effect on the Quick Ratio, since we subtract the Inventory out.

The Quick Ratio rising over time is favorable.