Question

Explain current ratio.

Hint:

Current Ratio = Liquidity measure; Ideal standard = 2:1.

Answer 1

Step 1: Definition.
Current ratio is a liquidity ratio that measures the ability of a company to pay its short-term obligations with its short-term assets.
Step 2: Formula.
\[ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} \] Step 3: Interpretation.
- If the current ratio is 2:1, it means the firm has two rupees of current assets for every one rupee of current liability.
- A ratio lower than 1 indicates liquidity problems, while too high a ratio indicates under-utilization of resources.
Step 4: Conclusion.
The ideal current ratio is generally considered 2:1, showing sound short-term financial health.