The acid test ratio is similar to the current ratio except that Inventory, Supplies, and Prepaid Expenses are excluded.
So, the acid test ratio compares the total of the cash, temporary marketable securities, and accounts receivable to the amount of current liabilities.
Therefore, the sum of cash, temporary securities, and accounts receivable will represent the numerator, and current liabilities will represent the denominator.
As an example, if the sum of the above items is $120,000, and current liabilities = $100,000, then the ratio will be 1.2 : 1 (which we get by dividing the numerator and denominator by $100,000).
By spending cash to buy inventory, the numerator will be a smaller number, and the acid test ratio will DECREASE.
If, from the above example, we spent $60,000 on inventory, the numerator would decrease to $60,000, and the ratio will become 0.6 : 1
