ACCA Financial Management (F9) Certification Practice Exam

What is the most liquid asset typically excluded from the quick ratio?

1. Cash

2. Accounts Receivable

3. Inventory

4. Short-term Investments

The correct answer is: Inventory

The quick ratio, also known as the acid-test ratio, is a financial metric used to evaluate a company's ability to meet its short-term obligations with its most liquid assets. This ratio specifically excludes inventory from its calculation because inventory is not as quickly convertible into cash compared to other assets such as cash and accounts receivable. Inventory requires time to sell and may not always be converted into cash immediately or at a predictable value, especially during periods of fluctuating demand or market conditions. The purpose of the quick ratio is to provide a more stringent measure of liquidity than the current ratio, focusing on assets that can be quickly accessed to fulfill liabilities. By excluding inventory, the quick ratio gives a clearer view of a company's immediate liquidity position. Including cash, accounts receivable, and short-term investments in the calculation allows for a more accurate assessment of the company's ability to handle short-term financial pressures without relying on the less liquid inventory. This is why inventory is the most liquid asset typically excluded from the quick ratio.