All of the following regarding the current ratio are true except:
A)Current ratio is calculated by dividing current assets by current liabilities.
B)Current ratio helps to assess a company's ability to pay its debts in the near future.
C)Current ratio does not affect a creditor's decision on whether to allow a company to buy on credit.
D)Current ratio can affect a creditor's decision about whether to lend money to a company.
E)Current ratio can reveal challenges in covering short-term obligations if it is less than 1.

Question

Quizplus · Accepted Answer

Current ratio is an important financial ratio that helps to assess a company's ability to pay its debts in the near future. It is calculated by dividing current assets by current liabilities. A higher current ratio indicates that a company has more current assets relative to its current liabilities, which means that it is better equipped to meet its short-term obligations. A lower current ratio indicates that a company may face challenges in covering its short-term obligations. This can affect a creditor's decision about whether to lend money to the company. However, current ratio does not affect a creditor's decision on whether to allow a company to buy on credit, as this decision is based on other factors like the customer's creditworthiness and history of payments.

All of the Following Regarding the Current Ratio Are True