Which of the following statements is true of the current ratio?
A) The larger the current ratio, the harder it is for the firm to pay its shortterm debts.
B) Current ratio is classified under the leverage ratio.
C) A current ratio below 1.0 signifies a company's inability to pay its shortterm liabilities with its current assets.
D) Current ratio is computed by dividing the firm's current liabilities by its current assets.

Question

Which of the following statements is true of the current ratio?
A) The larger the current ratio, the harder it is for the firm to pay its short­term debts.
B) Current ratio is classified under the leverage ratio.
C) A current ratio below 1.0 signifies a company's inability to pay its short­term liabilities with its current assets.
D) Current ratio is computed by dividing the firm's current liabilities by its current assets.

Quizplus · Accepted Answer

A current ratio below 1.0 signifies that a company's current liabilities are greater than its current assets, which indicates that the company may have difficulty paying off its short-term liabilities. A higher current ratio indicates a stronger ability to pay off short-term debts, making option A incorrect. Current ratio is actually classified under liquidity ratio, not leverage ratio, making option B incorrect. Finally, current ratio is computed by dividing the firm's current assets by its current liabilities, making option D incorrect.

Which of the Following Statements Is True of the Current