How is the quick ratio calculated?

• A. (Cash + Short-term investments) / Current liabilities
• B. (Cash + Net receivables + Short-term investments) / Total liabilities
• C. (Cash + Net receivables + Short-term investments) / Current liabilities
• D. (Net receivables) / Current liabilities

Answer: (C)

The quick ratio is a liquidity measure that assesses a company's ability to meet its short-term obligations with its most liquid assets. The correct calculation includes cash, net receivables, and short-term investments, divided by current liabilities.

The rationale behind using cash, net receivables, and short-term investments is that these assets can be quickly converted into cash or are already available in cash form. By excluding inventory and other less liquid assets from the equation, the quick ratio provides a more stringent test of liquidity.

In contrast, the other options either do not include net receivables or incorporate total liabilities rather than current liabilities, which would not assess the same short-term solvency. Additionally, option D omits both cash and short-term investments, providing an incomplete picture of liquidity. Therefore, the formulation that properly includes the components of cash, net receivables, and short-term investments while relating them specifically to current liabilities accurately defines the quick ratio.