Chartered Financial Analyst (CFA) Level 1 Practice Exam

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Which of the following is excluded in the quick ratio calculation?

Current assets
Cash
Marketable securities
Inventory

The correct answer is: Inventory

The quick ratio is a financial metric used to assess a company's short-term liquidity position by focusing on its most liquid assets. It measures the ability to cover current liabilities without relying on the sale of inventory, as inventory can take time to sell and may not be readily convertible into cash. In the quick ratio calculation, only the most liquid assets, such as cash, cash equivalents, and marketable securities, are included. These assets can quickly be turned into cash, thus providing a clear view of the company’s immediate financial health. On the other hand, inventory is excluded from the calculation because it is not as readily accessible in terms of cash flow. Inventory typically requires time and effort to be sold and may not have a guaranteed market value at any given moment. By excluding inventory, the quick ratio provides a more conservative view of liquidity, ensuring that stakeholders focus on the assets that can be quickly liquidated to meet short-term obligations. This distinction is crucial for investors and creditors when evaluating the financial stability of a business.