Which statement differentiates the quick ratio from the current ratio?

Which statement differentiates the quick ratio from the current ratio?

• A. Quick ratio excludes inventory.
• B. Quick ratio uses total assets instead of current assets.
• C. Quick ratio includes inventory.
• D. Quick ratio includes depreciation of assets.

Answer: (C)

The main idea is that the quick ratio is a stricter test of short-term liquidity than the current ratio because it removes inventory from the calculation. The quick ratio uses only the most liquid current assets: quick ratio = (current assets minus inventory) / current liabilities. In contrast, the current ratio uses all current assets: current assets / current liabilities. By excluding inventory, the quick ratio focuses on assets that can be quickly converted to cash, providing a more conservative view of liquidity. For example, if current assets are 500 and inventory is 120 with current liabilities of 250, the current ratio is 2.0, while the quick ratio is (500−120)/250 = 1.52. This illustrates how inventory can inflate the current ratio but not the quick ratio. The other statements don’t fit because using total assets would measure liquidity across the entire balance sheet, not just short-term assets; including inventory would contradict the defining exclusion; and depreciation of assets is a non-cash accounting adjustment and does not enter into the quick or current ratio calculations.

The main idea is that the quick ratio is a stricter test of short-term liquidity than the current ratio because it removes inventory from the calculation. The quick ratio uses only the most liquid current assets: quick ratio = (current assets minus inventory) / current liabilities. In contrast, the current ratio uses all current assets: current assets / current liabilities. By excluding inventory, the quick ratio focuses on assets that can be quickly converted to cash, providing a more conservative view of liquidity.

For example, if current assets are 500 and inventory is 120 with current liabilities of 250, the current ratio is 2.0, while the quick ratio is (500−120)/250 = 1.52. This illustrates how inventory can inflate the current ratio but not the quick ratio.

The other statements don’t fit because using total assets would measure liquidity across the entire balance sheet, not just short-term assets; including inventory would contradict the defining exclusion; and depreciation of assets is a non-cash accounting adjustment and does not enter into the quick or current ratio calculations.