In this example, the Acid Test shows that is you were able to sell all of your Assets today and recover their staed values, you would be able to cover 84% of your investment; the remaining 16% is tied up in your Debtors.
The equation excludes the value of Debtors because it is unlikely that you would be able to recover all of this money from the people that owe it to you.
The acid test is sometimes shown as a ratio as opposed to a percenatge. In this instance the reported figure above would be 0.84:1 (C ÷ D)
Example:
A) Total Assets = R4,623,256 B) Company Debtors = R735,994 C) Assets minus Debtors = R3,887,262 (A - B) D) Total Liabilities = R4,623,256 E) Acid Test = 84% (C ÷ D X 100)
Discussion:
This
version of the Acid Test measures the balance between the debtors and
the rest of the company's investments. This KPI asks the question, if
you were to sell all of your Assets today how much money would you be
able to recover?