Question

What is your favorite ratio? Why?

Answer 1

My favorite ratio is Current Ratio which is calculated by dividing total current assets by the total current liabilities.

Formula -

Current Ratio = Total Current Assets / Total Current Liabilities

Any asset that can be sold or used or gets over within a period of one year or 12 months are called current assets, for examples, Cash, Accounts Receivable, Inventory, Prepaid Expenses etc.

Any liability that needs to be paid within a period of one year or 12 months are called current liabilities, for examples, Accounts Payable, Short-term notes payable, interest payable, salaries payable, income tax payable, unearned revenue etc.

The reason why i like the current ratio is that it is one of the liquidity ratio and it tells to the business that whatever resources are available can meet its short-term obligations in that particular period or not.