The acid test ratio is method of determining whether a business has sufficient short-term assets to cover its immediate liabilities. It is regarded as a far more stringent indicator than ‘working capital ratio’ because it does not allow for the inclusion of ‘inventory assets’ such as stock on hand. It can be calculated by the following: Cash + Accounts Receivable + Short-Term Investments less Current Liabilities. The term comes from the ‘acid test’ gold miners would use to check if they had discovered real gold nuggets.
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