The acid-test ratio, also known as the liquidity ratio, indicates how well a company can meet its short-term commitments. An acid test indicates how quickly a company can convert its short-term assets to pay short-term liabilities. It is essentially a measure of a company’s liquidity. A number less than one may indicate that a company lacks sufficient liquid assets to cover its current liabilities.
Cash + Marketable Securities + Accounts Receivable
Current assets – inventory
Inventory is not included in the acid test ratio because it cannot be converted into cash quickly and easily as compared to marketable securities or accounts receivable. Inventory turnover necessitates a substantial amount of time and effort.
A qualified opinion is an audit opinion issued by independent external auditors when they discover material misstatement in financial statements but the misstatement is not pervasive. Auditors typically provide a qualified opinion, stating that the financial statements are free of material misstatements, except for specific transactions, balances, or circumstances.