How to Calculate Quick Ratio
4. Prepaid Expenses. Further subtract prepaid expenses from above. Though prepaid expenses are assets in that they imply some definite future outflows already met, they cannot be converted into cash, if required. It is extremely rare that advance payment for business expenses are refunded by the third parties.
5. You arrive at the ‘quick assets’ that typically include cash, cash equivalents (marketable securities), and accounts receivable/debtors.
6. Consider total current liabilities and its breakup.
7. Bank Overdraft. Subtract bank overdraft from the total current liabilities. Bank overdrafts are drawn against credit lines that usually extend for periods beyond a year and are often renewed on expiry. More or less, these instruments become a permanent source of financing. As a common practice, bank overdrafts are not callable on demand, adding a further degree of permanence.
8. You get quick liabilities that typically include accounts receivable/creditors, current portion of long-term debt, income tax payable, and accrued expenses of various types.
9. Use formula for final calculation to arrive at the ratio:
Quick Ratio = Quick Assets/Quick Liabilities
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