What is the formula for the acid test ratio, also known as the quick ratio?

The acid test ratio, or quick ratio, is a financial metric used to assess a company's short-term liquidity and ability to meet its current liabilities without relying on the sale of inventory. The formula for the acid test ratio is structured as follows:

Current Assets are adjusted by excluding Inventory, since inventory may not be easily convertible to cash in the short term. Thus, the formula specifically is:

(Current Assets - Inventory) / Current Liabilities.

This approach provides a more conservative view of a company's liquidity by focusing solely on the most liquid assets, which include cash, cash equivalents, and receivables. By dividing this adjusted number by current liabilities, the ratio shows the proportion of liquid assets available to cover obligations, allowing investors and analysts to gauge financial health accurately.

The correct answer emphasizes this critical aspect of liquidity analysis, ensuring that only readily available assets are considered when determining a company's ability to pay its debts. Other formulas listed do not align with this definition, as they either include inventory or do not accurately reflect the intention behind the acid test ratio.