What is the current ratio?

• A. Current Liabilities / Current Assets
• B. Net Income / Total Assets
• C. Current Assets / Current Liabilities
• D. Total Liabilities / Total Equity

Answer: (C)

The current ratio measures liquidity by comparing current assets to current liabilities. It shows how many dollars of assets that can be converted to cash within a year are available to cover obligations due within a year. The formula is current assets divided by current liabilities. If the ratio is greater than 1, the company has more short-term assets than short-term obligations, signaling a cushion to pay bills; if it’s less than 1, there may be liquidity concerns. Current assets include items like cash, accounts receivable, and inventory, while current liabilities include accounts payable, short-term loans, and other obligations due within a year. This ratio focuses on near-term financial health, unlike profitability or leverage measures such as net income over total assets or total liabilities over total equity.