CMA Study Group

Quick ratio

  • 1.  Quick ratio

    Posted 24 days ago
    Can someone tell me in plain words and can give a logical answer to - Why are the prepaid expenses not included in Quick Ratio?

    I know it is not included, but i cant seem to write an explanation to it.

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    Nupur Mahajan
    nupur1188@...
    Hartford CT United States
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  • 2.  RE: Quick ratio

    Posted 24 days ago
    The quick ratio is a much more conservative measure of the company's short-term liquidity using the most liquid assets.
    Prepaid expenses are very illiquid assets and as such are not included, although we include them as part of the current ratio.


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    Michael Henry
    Controller
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  • 3.  RE: Quick ratio

    Posted 24 days ago
    Quick ratios include only those assets, which are highly liquid and readily convertible to cash. Prepaid expense, though is an asset, cannot be converted into cash as it is an advance paid against a future services. Thus, the same is eliminated from the quick ratio calculus.

    Kind Regards,
    Sumit




  • 4.  RE: Quick ratio

    Posted 24 days ago
    I found this response on the IMA exam package:
    "The purpose of the acid test ratio is to measure debt-paying ability using highly liquid assets. Items such as prepaid insurance may be excluded as they do not represent current cash flow"

    And this explanation from Gleim;
    "the Quick (acid test) ratio excludes inventories & prepaids  from the numerator recognizing that those assets are difficult to liquidate at their stated values, the Quick ratio is thus more conservative measure than the basic current ratio"

    Regards
    Yasser

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    Yasser Elsayed

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