Acid Test Ratio
(Liquid Capital Ratio).
Formula
Acid Test Ratio = (Current Assets − Inventories) ÷ Current Liabilities
Real World
Retailers like Next hold large clothing inventories that cannot be quickly converted to cash, so their acid test ratio is typically lower than their current ratio.
Exam Focus
State why inventory is excluded (it is the least liquid current asset) — this explanation is required for full marks in analysis questions.
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