What is the formula for the current ratio?

What is the formula for the current ratio?

• A. Current Assets ÷ Current Liabilities
• B. Total Liabilities ÷ Total Assets
• C. Current Assets - Current Liabilities
• D. Net Profit ÷ Revenue

Answer: (A)

Measuring short-term liquidity, the current ratio compares what a business can convert to cash within a year to what it owes in that same period. The formula is current assets divided by current liabilities. This directly shows whether there are enough short-term resources to cover obligations as they come due. For example, if current assets are 120,000 and current liabilities are 60,000, the ratio is 2.0, meaning assets cover twice the obligations. The other ideas mix different concepts: liabilities relative to assets is a solvency measure, not a liquidity gauge. Subtracting current liabilities from current assets gives net working capital in dollar terms, not a ratio. Net profit divided by revenue is a profitability metric, not about short-term ability to meet obligations. So the formula that represents the current ratio is current assets divided by current liabilities.

Measuring short-term liquidity, the current ratio compares what a business can convert to cash within a year to what it owes in that same period. The formula is current assets divided by current liabilities. This directly shows whether there are enough short-term resources to cover obligations as they come due. For example, if current assets are 120,000 and current liabilities are 60,000, the ratio is 2.0, meaning assets cover twice the obligations.

The other ideas mix different concepts: liabilities relative to assets is a solvency measure, not a liquidity gauge. Subtracting current liabilities from current assets gives net working capital in dollar terms, not a ratio. Net profit divided by revenue is a profitability metric, not about short-term ability to meet obligations.

So the formula that represents the current ratio is current assets divided by current liabilities.