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Ratios Made Simple: A beginner's guide to the key financial ratios by Robert Leach

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6. Solvency Ratios

6.1: Acid Test

Definition

Acid test = (current assets – stock) ÷ current liabilities

Acid test is sometimes called the acid test ratio, acid ratio, liquidity ratio or quick ratio. Occasionally it is referred to as the current ratio, but that term is better reserved for a different ratio explained below.

The term comes from the California Gold Rush of the 1850s when it was often difficult to distinguish valuable gold from worthless iron pyrites. A simple test was to use nitric acid, which was cheap and readily available. A drop of acid would quickly react with iron pyrites but gold would be unaffected. From this, the term was extended to any quick test to check provenance.

Current assets are cash, its equivalents ...

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