Question

Ideal current ratio is

• A. 4 : 1
• B. 3 : 2
• C. 1 : 2
• D. 2 : 1

Hint:

A 2:1 current ratio means the company has twice as many current assets as liabilities — a safe liquidity position without underutilizing resources.

Answer 1

The Correct Option is D

Step 1: Understanding the current ratio.
The Current Ratio is a liquidity ratio that measures a company’s ability to meet its short-term obligations using its current assets.
It indicates whether the company has enough resources to pay off its immediate debts within a year.
Step 2: Formula.
\[ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} \] This ratio shows how many times the current assets cover the current liabilities.
Step 3: Meaning of the ideal ratio.
An ideal current ratio is generally considered to be 2:1, which means that for every ₹1 of current liability, the company has ₹2 in current assets.
This ensures sufficient liquidity and safety for meeting short-term obligations without facing a cash crunch.
Step 4: Significance of 2:1.
A ratio higher than 2:1 may indicate excessive idle current assets or poor utilization of resources.
A ratio lower than 2:1 may suggest liquidity problems or over-dependence on short-term financing.
Hence, 2:1 provides a balanced level of safety and efficiency.
Step 5: Analysis of options.
- (1) 4 : 1 — Too high, indicates over-capitalization or inefficient asset use.
- (2) 3 : 2 — Low and risky for creditors.
- (3) 1 : 2 — Illogical; liabilities exceed assets.
- (4) 2 : 1 — Correct, ideal balance between liquidity and efficiency.
Step 6: Conclusion.
Therefore, the ideal Current Ratio is 2:1, signifying sound short-term financial health.