What is the formula for the current ratio?

What is the formula for the current ratio?

• A. Current liabilities divided by current assets.
• B. Current assets divided by current liabilities.
• C. Net assets divided by current liabilities.
• D. Total assets divided by total liabilities.

Answer: (B)

Short-term liquidity is about whether a business can meet its obligations that are due soon from the assets it can readily convert to cash. The formula used is current assets divided by current liabilities. This shows how many dollars of resources that can be turned into cash within a year are available for every dollar of obligations due in that period. Current assets include cash, receivables, and inventory, while current liabilities include payables and short-term borrowings. A higher ratio indicates greater ability to cover short-term debts, though very high values can suggest underutilized assets. The other options mix up the concept: inverting the ratio would not reflect liquidity; using net assets instead of current assets shifts to a different measure; and total assets over total liabilities is a broader solvency ratio, not the liquidity measure asked for.

Short-term liquidity is about whether a business can meet its obligations that are due soon from the assets it can readily convert to cash. The formula used is current assets divided by current liabilities. This shows how many dollars of resources that can be turned into cash within a year are available for every dollar of obligations due in that period. Current assets include cash, receivables, and inventory, while current liabilities include payables and short-term borrowings. A higher ratio indicates greater ability to cover short-term debts, though very high values can suggest underutilized assets. The other options mix up the concept: inverting the ratio would not reflect liquidity; using net assets instead of current assets shifts to a different measure; and total assets over total liabilities is a broader solvency ratio, not the liquidity measure asked for.