The formula for computing the current ratio is ________.
A)Current ratio = Current assets / Total assets
B)Current ratio = Current assets / Total liabilities
C)Current ratio = Current assets / Owner's Equity
D)Current ratio = Current assets / Current liabilities

Question

Quizplus · Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities. This measures a company's ability to pay its short-term debts. Therefore, the most appropriate formula is Current ratio = Current assets / Current liabilities. Option A is incorrect because it measures the proportion of current assets to total assets, not the liquidity of the company. Option B is incorrect because it measures the proportion of current assets to total liabilities, which does not provide a complete picture of the company's short-term financial health. Option C is incorrect because it measures the proportion of current assets to owner's equity, which does not provide a complete picture of the company's ability to meet its current obligations.

The Formula for Computing the Current Ratio Is ________