What does the quick ratio measure?

The quick ratio, also known as the acid-test ratio, is designed to measure a company's short-term liquidity and ability to meet its current obligations without relying on the sale of inventory. The formula for the quick ratio is calculated by taking current assets and subtracting inventory, then dividing that number by current liabilities.

This ratio is important as it provides a clearer picture of a company's liquidity position by focusing on the most liquid assets—typically cash, cash equivalents, and receivables—which can be quickly converted to cash if necessary. Inventory, while a part of current assets, is typically not included in this ratio because it may not be as readily realized in cash in times of financial distress.

Given this understanding, the correct choice reflects the proper formula for the quick ratio, emphasizing the exclusion of inventory from current assets in its computation. This helps stakeholders analyze how efficiently a company can pay off its current liabilities in a pinch, making it a crucial measure for assessing financial health.