Acid-test (quick) ratio should generally fall within which range?

• A. 1-2
• B. 0.5-1.0
• C. 2-3
• D. 3-4

Answer: (A)

The acid-test ratio measures a company’s immediate liquidity by comparing its most liquid assets—cash, marketable securities, and accounts receivable—to current liabilities, excluding inventory since it isn’t quickly convertible to cash. It answers whether the firm can meet its short-term obligations with assets that can be readily turned into cash.

A ratio around 1 means there’s just enough liquid assets to cover current liabilities, and a bit higher (up to about 2) shows a comfortable cushion without tying up too much capital in liquid form. If the ratio dips below 1, liquidity is tight; if it climbs well above 2, the company may be holding too much liquidity rather than using it productively. Therefore, the generally appropriate range is between 1 and 2.