Updated November 27, 2023
AcidTest Ratio Formula (Table of Contents)
 AcidTest Ratio Formula
 AcidTest Ratio Formula Calculator
 AcidTest Ratio Formula in Excel (with Excel Template)
AcidTest Ratio Formula
AcidTest ratio is also known as the quick ratio. The acidtest ratio evaluates an enterprise’s shortterm solvency or liquidity position.
In simple language, it measures the capability of the company to pay its debt with its current assets. Current assets are assets that can be converted to cash within 90 days. It is often desirable to know a firm’s more immediate position or instant debtpaying ability than that indicated by the current ratio for this acidtest ratio. It relates the most liquid assets to current liabilities. Acidtest ratio formula is the sum of cash, shortterm investment, and current receivables minus inventory minus prepayment divided by current liabilities. It can be written as
In short, a test can be written as –
Examples of AcidTest Ratio Formula
Let’s see an example to understand it better.
AcidTest Ratio Formula – Example #1
A financial analyst wants to study the liquidity position of HML Pvt. Ltd below its balance sheet for 2018 for analysis.
Particulars  2018 
Cash and Cash Equivalent  $50,000.00 
Short Term Investment  $10,000.00 
Receivable  $2,000.00 
Inventories  $3,000.00 
Other Current Assets  $8,900.00 
Total Assets  $75,918.00 
Total Liabilities  $36,450.00 
The formula for the test is –
AcidTest Ratio = Cash + ShortTerm Investments + Current Receivables –Inventory –Prepaid Expenses / Current Liabilities
Put the value from the balance sheet in the above formula.
 AcidTest Ratio = 50 000 + 10,000 + 2,000 + 8,900 – 3,000 / 36,450
 AcidTest Ratio = 1.86
So, the acidtest ratio of HML Pvt. Ltd is 1.86, which means it has a lot of liquid assets and high liquidity.
AcidTest Ratio Formula – Example #2
Three companies have the following current assets and current liabilities, through which we will calculate the acidtest ratio.
Particulars  S&S Pvt. Ltd  Anty Pvt. Ltd  Mile Pvt. Ltd 
Current Assets  $74,125.00  $96,321.00  $125,610.00 
Inventory  $1,230.00  $2,541.00  $5,213.00 
NonCurrent Liabilities  $22,000.00  $45,000.00  $51,000.00 
Total Liabilities  $35,000.00  $51,000.00  $62,000.00 
Acidtest Ratio  5.60  15.63  10.94 
Where,
AcidTest Ratio = Current Assets – Inventory / Current Liability
Put value for three companies in the above formula.
S&S Pvt. Ltd:
 AcidTest Ratio of S&S Pvt. Ltd = (74,125 – 1,230) / (35,000 – 22,000)
 AcidTest Ratio of S&S Pvt. Ltd = 72,895 / 13000
 AcidTest Ratio of S&S Pvt. Ltd = 5.60
Anty Pvt. Ltd:
 AcidTest Ratio of Anty Pvt. Ltd =(96,321 – 2,541) / (51,000 – 45,000)
 AcidTest Ratio of Anty Pvt. Ltd =93,780 / 6,000
 AcidTest Ratio of Anty Pvt. Ltd =15.63
Mile Pvt. Ltd:
 AcidTest Ratio of Mile Pvt. Ltd =(125,610 – 5,213) / (62,000 – 51,000)
 AcidTest Ratio of Mile Pvt. Ltd =120,397/11,000
 AcidTest Ratio of Mile Pvt. Ltd =10.94
This is how the company’s acidtest ratio is calculated, and investors do an analysis to invest in the right company.
Let us see one more example to understand the Acidtest ratio formula.
AcidTest Ratio Formula – Example #3
Below is the balance sheet of Ultra Pvt. Ltd for the year 2018, we have to calculate the Acidtest ratio for the same.
Cash  $60,000.00  Account Payable  $12,000.00 
Market Securities  $5,000.00  Accrued Expensed  $3,000.00 
Accounts Receivable  $3,000.00  Notes Payable  $4,000.00 
Inventories  $1,500.00  Loan Liabilities  $14,000.00 
Total Current Assets  $69,500.00  Total Current Liabilities  $33,000.00 
The formula for the test is
AcidTest Ratio = Cash + Short Term Investments + Current Receivables –Inventory –Prepaid Expenses / Current Liabilities
Put the value in the above formula.
 AcidTest Ratio = 60,000 + 5,000 + 3,000 –1,500 / 33,000
 AcidTest Ratio = 2.01
So, the acidtest ratio for Ultra Pvt. Ltd is 2.01, which means it has a lot of liquid assets and high liquidity.
Explanation
The acidtest ratio is the sum of the current assets to current liabilities. A current asset is the sum of a company’s assets, which can be converted into cash within 90 days. Current assets are cash, shortterm investments, and cash equivalent cash, receivable minus inventories minus prepaid expenses divided by current liabilities. Inventories are not considered in the current asset as they cannot be converted into cash, and prepaid expenses are subtracted as they cannot be reversed back to cash easily. And the current liabilities are debts that the company has to repay.
If a company has a higher ratio, the better the company liquidity will be, which results in better overall financial health. But if the ratio is very high, it is also unfavorable as the company may have excess cash, but it is not using it beneficially. It is also possible that the company’s receivables are too high and cannot collect the same, which implies a collection problem.
The acidtest ratio depends on the type of industry, its market, the kind of business, and the nature and financial stability of the company.
Acidtest ratio formula can be written as –
AcidTest Ratio = Quick Assets / Current Liabilities
Where a quick asset is a current asset.
Significance and Uses of Acidtest Ratio Formula
There are many advantages and uses of the Acidtest ratio formula, and they are as follows
 The acidtest formula provides an appropriate picture of the company’s liquidity.
 It is most useful when the proportion of current illiquid assets to total current assets is high.
 It helps to find the financial condition of the company.
 This formula helps the investor choose the right company for investment depending on the value acidtest ratio.
 It also helps one to monitor the company’s collection system.
Disadvantages of AcidTest Ratio Formula
There are some issues with the acidtest ratio. They are as follows
 The acidtest ratio alone is not sufficient to find the company’s liquidity.
 The acidtest ratio does not include inventory, so it will not provide a clear picture as the company may have high inventories.
 In this formula, cash receivable is considered a current asset, but the company may not be able to collect the funds against it.
The acidtest ratio formula is valuable for assessing a company’s liquidity and ability to repay its debts. The ratio indicates whether a company can meet its financial obligations by comparing its quick assets to its current liabilities. A ratio of 1 signifies that the quick assets are equal to the current assets, indicating that the company can fulfill its debt obligations. On the other hand, a ratio of 2 suggests that the company has twice as many quick assets as current liabilities, which is a positive sign. However, an excessively high ratio, such as 10, is not considered favorable.
AcidTest Ratio Calculator
You can use the following AcidTest Ratio Calculator
Cash  
Short Term Investments  
Current Receivables  
Inventory  
Prepaid Expenses  
Current Liabilities  
Acid Test Ratio =  
Acid Test Ratio = 


AcidTest Ratio Formula in Excel (With Excel Template)
Here, we will do the same example of the AcidTest Ratio formula in Excel. It is very easy and simple. You need to provide the three inputs i.e, Current Assets, Inventory, and Current Liability
You can easily calculate the AcidTest Ratio using Formula in the template provided.
Acidtest for HML Pvt. Ltd is calculated as:
The test for all three Companies is calculated as:
Acidtest for Ultra Pvt. Ltd is calculated as:
Recommended Articles
This has been a guide to an AcidTest Ratio formula. Here, we discuss its uses along with practical examples. We also provide you with an AcidTest Ratio Calculator with a downloadable Excel template. You may also look at the following articles to learn more –