The Current Ratio is defined as which formula?

The Current Ratio is defined as which formula?

• A. Net Income / Equity
• B. CURRENT ASSETS / CURRENT LIABILITIES
• C. Quick assets / Current Liabilities
• D. Total Assets / Total Liabilities

Answer: (B)

The current ratio measures liquidity by showing how much in current assets a company has to cover its current liabilities. Current assets are resources expected to convert to cash within a year, like cash, accounts receivable, and inventory, while current liabilities are obligations due within the same period. The standard formula is current assets divided by current liabilities. This directly gauges the ability to meet short-term obligations with near-term resources, so it’s the appropriate measure of liquidity. Other options look at different concepts: net income divided by equity is a profitability measure (how much profit is earned per dollar of equity). Quick assets divided by current liabilities is the quick ratio, which is similar but excludes inventory. Total assets divided by total liabilities is more about overall solvency or leverage, not short-term liquidity.

The current ratio measures liquidity by showing how much in current assets a company has to cover its current liabilities. Current assets are resources expected to convert to cash within a year, like cash, accounts receivable, and inventory, while current liabilities are obligations due within the same period. The standard formula is current assets divided by current liabilities. This directly gauges the ability to meet short-term obligations with near-term resources, so it’s the appropriate measure of liquidity.

Other options look at different concepts: net income divided by equity is a profitability measure (how much profit is earned per dollar of equity). Quick assets divided by current liabilities is the quick ratio, which is similar but excludes inventory. Total assets divided by total liabilities is more about overall solvency or leverage, not short-term liquidity.