Michigan Residential Builders License Practice Test

What is a quick asset ratio?

1. 2 to 1

2. 1 to 1

3. 3 to 1

4. 4 to 1

The correct answer is: 1 to 1

The quick asset ratio, sometimes referred to as the acid-test ratio, is a financial metric used to assess a company's short-term liquidity. This ratio provides insight into a company's ability to meet its short-term obligations with its most liquid assets. The formula for calculating the quick asset ratio is: Quick Asset Ratio = (Current Assets - Inventory) / Current Liabilities A quick asset ratio of 1 to 1 indicates that a company has enough liquid assets to cover its current liabilities. This means that for every dollar of current liabilities, the company has a dollar’s worth of liquid assets, excluding inventory. This value is particularly significant because it shows that the business is in a position to pay off its liabilities without relying on the sale of inventory, which may not be quickly convertible into cash. Having a ratio of 1 to 1 is generally considered a good standard for financial health, as it suggests that the business can meet its obligations without needing to liquidate less liquid assets. A ratio lower than this may indicate potential liquidity issues, while a significantly higher ratio could imply that a company is not effectively utilizing its current assets.