One of the most important assumptions behind the calculation of quick ratio is that: The firm’s accounts receivables can be collected and converted into cash within the time period for which credit was granted The firm’s inventories are highly liquid and can be sold quickly with minimal loss of value to assist in the settlement of the firm’s financial obligations The firm’s accounts receivables will be collected late (after the expiration of the credit period) or are uncollectible

The firm’s accounts receivables can be collected and converted into cash within the time period for which credit was granted

Explanation:

The calculation of the Quick Ratio is done with this formula:

Quick Ratio = ( Current Assets - Inventories ) / Current liabilities.

As we can see, inventories are substracted from the calculation, because, despite being classified as a current asset, they are not so easy to sell off (in other words, inventories are not that liquid).

Accounts receivable are included in the calculation. This is because the formula assumes that receivables can be collected in the same period that the liabilities are due.

The quick ratio is also known as the Acid Test.