See how much of Meridian Retail's current position is already cash or one step from it.
$20,000
Cash $8,000 + short-term investments $2,000 + receivables $10,000
$16,000
1.25
Merchandise inventory of $5,000 is left out entirely — it still has to sell before it is cash.
The only counts assets already cash or one step from it: cash itself, short-term investments, and current receivables. Merchandise inventory has to sell, and then the receivable has to be collected, before it is cash.
A company can carry a healthy current ratio built mostly on slow-moving inventory and still struggle to pay this month's bills. The acid-test ratio catches that; the current ratio does not.