If current assets are $40,000 and current liabilities are $25,000, what is the current ratio and what does it suggest?

If current assets are $40,000 and current liabilities are $25,000, what is the current ratio and what does it suggest?

• A. 2.0; indicates strong liquidity
• B. 1.0; indicates breakeven
• C. 0.62; indicates liquidity risk
• D. 1.6; indicates ability to cover short-term obligations

Answer: (D)

The current ratio measures liquidity by comparing assets that can be turned into cash in the near term with obligations due soon, showing how well a firm can cover its short-term debts. With current assets of 40,000 and current liabilities of 25,000, the ratio is 40,000 divided by 25,000, which equals 1.6. This means there is $1.60 in current assets for every $1 of current liabilities, indicating the company can cover its short-term obligations. It suggests modest-to-good liquidity—not extremely strong, but enough to meet short-term needs. For context, a ratio around 2.0 would imply stronger liquidity, a ratio of 1.0 means assets and liabilities are equal, and a ratio below 1.0 signals potential liquidity risk.

The current ratio measures liquidity by comparing assets that can be turned into cash in the near term with obligations due soon, showing how well a firm can cover its short-term debts. With current assets of 40,000 and current liabilities of 25,000, the ratio is 40,000 divided by 25,000, which equals 1.6. This means there is $1.60 in current assets for every $1 of current liabilities, indicating the company can cover its short-term obligations. It suggests modest-to-good liquidity—not extremely strong, but enough to meet short-term needs. For context, a ratio around 2.0 would imply stronger liquidity, a ratio of 1.0 means assets and liabilities are equal, and a ratio below 1.0 signals potential liquidity risk.