How is the quick ratio calculated?

The quick ratio is a financial metric used to evaluate a company's short-term liquidity and its ability to meet its short-term obligations without relying on the sale of inventory. The correct calculation involves subtracting inventory from current assets, which reflects the most liquid current assets a company has at its disposal. This is then divided by current liabilities to assess how easily the company can cover its debts with its readily available resources.

In detail, the formula for the quick ratio is derived as follows:

1. Start with current assets, which include cash, accounts receivable, and inventory.

2. Subtract inventory from current assets since inventory may not be as readily available to convert into cash quickly as the other components of current assets.

3. Divide the result by current liabilities, which are obligations the company must settle within a year.

This calculation gives a clearer picture of the company’s immediate liquidity position compared to the current ratio, which includes inventory in the assets considered. Therefore, focusing on the most liquid forms of assets provides investors and creditors with more relevant insights when assessing financial health.

This context highlights why the other options do not accurately represent the quick ratio. They either do not account for inventory correctly or misrepresent the relationship with current liabilities.