Which equation calculates the current ratio?

Which equation calculates the current ratio?

• A. Current assets + current liabilities
• B. Current assets - current liabilities
• C. Current assets / current liabilities
• D. Current liabilities / current assets

Answer: (C)

The current ratio is a financial metric used to assess a company's ability to pay its short-term obligations with its short-term assets. It is specifically calculated by dividing current assets by current liabilities. This ratio provides insight into the liquidity position of a company, indicating how well it can cover its short-term debts with the assets it has readily available. A higher current ratio suggests that a company is in a stronger position to meet its obligations, while a lower ratio may indicate potential liquidity issues. The other choices do not accurately reflect this important financial measure. For instance, adding current assets to current liabilities would not provide relevant information about liquidity, as it does not take into account the relationship between what a company owns and what it owes. Similarly, subtracting current liabilities from current assets might give a sense of the net short-term resources, but it does not express the company's ability to meet its liabilities as a proportion of its assets. Lastly, dividing current liabilities by current assets inversely portrays the situation and does not indicate the readiness of a company to cover its obligations. Thus, the method of dividing current assets by current liabilities is the appropriate and commonly accepted way to calculate the current ratio.

The current ratio is a financial metric used to assess a company's ability to pay its short-term obligations with its short-term assets. It is specifically calculated by dividing current assets by current liabilities. This ratio provides insight into the liquidity position of a company, indicating how well it can cover its short-term debts with the assets it has readily available. A higher current ratio suggests that a company is in a stronger position to meet its obligations, while a lower ratio may indicate potential liquidity issues.

The other choices do not accurately reflect this important financial measure. For instance, adding current assets to current liabilities would not provide relevant information about liquidity, as it does not take into account the relationship between what a company owns and what it owes. Similarly, subtracting current liabilities from current assets might give a sense of the net short-term resources, but it does not express the company's ability to meet its liabilities as a proportion of its assets. Lastly, dividing current liabilities by current assets inversely portrays the situation and does not indicate the readiness of a company to cover its obligations. Thus, the method of dividing current assets by current liabilities is the appropriate and commonly accepted way to calculate the current ratio.