Which liquidity measure excludes inventory from current assets?

Which liquidity measure excludes inventory from current assets?

• A. Current Ratio
• B. Quick Ratio (Acid-Test)
• C. Debt Ratio
• D. Asset Turnover

Answer: (B)

Liquidity measures focus on whether a company can meet its short-term obligations using assets that can be quickly turned into cash. The quick ratio, also known as the acid-test, is the measure that excludes inventory from current assets. By removing inventory, it asks: do we have enough of the most liquid assets—cash, marketable securities, and accounts receivable—to cover current liabilities? This makes the quick ratio a more conservative test of immediate liquidity than the current ratio, which includes inventory and can overstate how readily assets can be converted to cash. For a landscaping contractor, inventory like materials may not be instantly saleable, so relying on the quick ratio gives a clearer picture of cash-ready liquidity. The other options aren’t liquidity tests: the debt ratio is a solvency measure comparing total debt to total assets, and asset turnover assesses how efficiently assets generate sales rather than short-term cash availability.

Liquidity measures focus on whether a company can meet its short-term obligations using assets that can be quickly turned into cash. The quick ratio, also known as the acid-test, is the measure that excludes inventory from current assets. By removing inventory, it asks: do we have enough of the most liquid assets—cash, marketable securities, and accounts receivable—to cover current liabilities? This makes the quick ratio a more conservative test of immediate liquidity than the current ratio, which includes inventory and can overstate how readily assets can be converted to cash. For a landscaping contractor, inventory like materials may not be instantly saleable, so relying on the quick ratio gives a clearer picture of cash-ready liquidity. The other options aren’t liquidity tests: the debt ratio is a solvency measure comparing total debt to total assets, and asset turnover assesses how efficiently assets generate sales rather than short-term cash availability.