Amber Book Practice Management (PcM) Practice Test

Which asset is excluded by the quick ratio that is included in the current ratio?

Inventory Cash Accounts receivable Prepaid expenses

Correct Answer:

Inventory

Explanation:

The essential idea is liquidity: the current ratio uses all current assets, while the quick ratio uses only the most liquid assets. Inventory sits in the current ratio because it can be turned into cash, but not as quickly as cash, marketable securities, or accounts receivable. The quick ratio excludes inventory for this reason, focusing only on assets that are readily convertible to cash in the near term. Therefore, the asset that is included in the current ratio but excluded by the quick ratio is inventory. (Cash and accounts receivable are included in both ratios, while prepaid expenses are generally not counted in the quick ratio.)

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