What is the primary purpose of calculating the current ratio?
Practice Questions
Q1
What is the primary purpose of calculating the current ratio?
To assess profitability
To evaluate liquidity
To measure solvency
To analyze efficiency
Questions & Step-by-Step Solutions
What is the primary purpose of calculating the current ratio?
Step 1: Understand what the current ratio is. It is a financial metric that compares a company's current assets to its current liabilities.
Step 2: Identify what current assets are. These are assets that can be converted into cash within one year, like cash, inventory, and accounts receivable.
Step 3: Identify what current liabilities are. These are obligations that the company needs to pay within one year, like accounts payable and short-term debt.
Step 4: Calculate the current ratio using the formula: Current Ratio = Current Assets / Current Liabilities.
Step 5: Interpret the current ratio. A ratio greater than 1 means the company has more current assets than current liabilities, indicating good liquidity.
Step 6: Understand the primary purpose of calculating the current ratio. It helps assess whether a company can meet its short-term financial obligations.
