What does the current ratio measure?

What does the current ratio measure?

• A. The extent to which current assets finance current liabilities.
• B. The efficiency of inventory management.
• C. The profitability of current assets.
• D. The leverage of long-term debt.

Answer: (A)

The current ratio is a liquidity measure that shows the extent to which current assets finance current liabilities. It is calculated by dividing current assets by current liabilities. This ratio indicates how easily the entity can meet its short-term obligations as they become due. If current assets exceed current liabilities, the ratio is above 1, signaling a cushion to cover short-term debts; if it’s below 1, liquidity may be tight. It’s not about inventory efficiency, profitability, or long-term debt leverage—those would be assessed by other ratios. A very high ratio suggests ample liquidity but could also mean idle resources, while a very low ratio points to potential short-term liquidity problems.

The current ratio is a liquidity measure that shows the extent to which current assets finance current liabilities. It is calculated by dividing current assets by current liabilities. This ratio indicates how easily the entity can meet its short-term obligations as they become due. If current assets exceed current liabilities, the ratio is above 1, signaling a cushion to cover short-term debts; if it’s below 1, liquidity may be tight. It’s not about inventory efficiency, profitability, or long-term debt leverage—those would be assessed by other ratios. A very high ratio suggests ample liquidity but could also mean idle resources, while a very low ratio points to potential short-term liquidity problems.