What is the current ratio formula?

What is the current ratio formula?

• A. Current assets/current liabilities
• B. Current liabilities/current assets
• C. Net income/current assets
• D. Current assets/Total assets

Answer: (A)

This measures liquidity by comparing current assets to current liabilities. It shows how many dollars of assets likely to be converted to cash within a year are available to cover obligations due within the same period. The current assets include items like cash, accounts receivable, and inventory, while current liabilities include accounts payable, short-term debt, and other obligations due within a year. If the ratio is, for example, 1.5, it means there are $1.50 in current assets for every $1.00 of current liabilities, indicating a comfortable short-term position. The other options don’t fit because one reverses the relationship it’s trying to measure (current liabilities divided by current assets), another mixes in net income which is about profitability, and the last uses total assets, which includes long-term resources not tied to short-term obligations.

This measures liquidity by comparing current assets to current liabilities. It shows how many dollars of assets likely to be converted to cash within a year are available to cover obligations due within the same period. The current assets include items like cash, accounts receivable, and inventory, while current liabilities include accounts payable, short-term debt, and other obligations due within a year. If the ratio is, for example, 1.5, it means there are $1.50 in current assets for every $1.00 of current liabilities, indicating a comfortable short-term position.

The other options don’t fit because one reverses the relationship it’s trying to measure (current liabilities divided by current assets), another mixes in net income which is about profitability, and the last uses total assets, which includes long-term resources not tied to short-term obligations.