Which statement best describes the difference between the current ratio and the quick ratio?

Which statement best describes the difference between the current ratio and the quick ratio?

• A. The quick ratio excludes inventory; the current ratio includes inventory.
• B. The quick ratio includes inventory; the current ratio excludes inventory.
• C. They measure the same thing with identical components.
• D. The quick ratio uses long-term assets instead of current assets.

Answer: (A)

The key idea is liquidity and how it’s measured with different levels of asset liquidty. The current ratio looks at all current assets—cash, marketable securities, receivables, and inventory—relative to current liabilities. The quick ratio takes a stricter view by excluding inventory and using only the most liquid assets—cash, marketable securities, and receivables—compared with current liabilities. Because inventory isn’t as readily convertible to cash in the short term, it’s omitted in the quick ratio. That’s why the statement that the quick ratio excludes inventory while the current ratio includes it is the best description. The other options misstate which assets are included, or imply they’re identical, or suggest long-term assets are used, which isn’t correct.

The key idea is liquidity and how it’s measured with different levels of asset liquidty. The current ratio looks at all current assets—cash, marketable securities, receivables, and inventory—relative to current liabilities. The quick ratio takes a stricter view by excluding inventory and using only the most liquid assets—cash, marketable securities, and receivables—compared with current liabilities. Because inventory isn’t as readily convertible to cash in the short term, it’s omitted in the quick ratio. That’s why the statement that the quick ratio excludes inventory while the current ratio includes it is the best description. The other options misstate which assets are included, or imply they’re identical, or suggest long-term assets are used, which isn’t correct.