Difference Between Current Ratio and Quick Ratio


What is the difference between the current ratio and the quick ratio?


The current ratio and the quick ratio (also known as the acid test ratio) are commonly used to determine a company’s liquidity.  In other words, these two ratios are used to determine a firm’s ability to pay current liabilities with assets that can quickly be converted into cash (if not cash already). Liquidity is clearly an important aspect of a company because it is necessary for the business to stay in operations.

The current and quick ratios vary slightly in how they are calculated. Let’s take a look at the formulas for each ratio.

Current Ratio

Current Assets ÷ Current Liabilities

Quick Ratio

(Cash & Cash Equivalents + Short-Term Investments + Net Current Receivables) ÷ Total Current Liabilities

Current Ratio vs Quick Ratio

You will notice when you review the two formulas that the current ratio  formula includes all current assets. This is not the case for the quick ratio. This ratio only uses cash & cash equivalents, short-term investments, and net current receivables. The quick ratio takes a more conservative approach compared to the current ratio. It leaves out the commonly least  liquid assets such as inventory and prepaid expenses.

Let’s take a look how the two ratios are calculated using the below balance sheet information.

Current Assets Current Liabilities 
Total Current Assets$48,000Total Current Liabilities$14,000
Cash$10,000Accounts Payable$3,000
Accounts Receivable (Net Current)$5,000Interest Payable$1,000
Marketable Securities$20,000Accrued Expenses$2,000
Government Bonds$3,000Taxes Payable$4,000
Inventory$10,000Note Payable (Short-Term)$4,000

The current ratio is calculated as follows:

$48,000 ÷ $14,000 = 3.43:1

The quick ratio is calculated below:

($10,000 + $5,000 + $20,000 + $3,000) ÷ $14,000 = 2.71:1

Notice the difference in the two calculations is that inventory for $10,000 is included in the current ratio, but not in the more conservative quick ratio.