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15) How is the current ratio calculated? What is its significance in analyzing financial statements?

15) How is the current ratio calculated? What is its significance in analyzing financial statements?

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Answer #1

Current ratio is calculated by dividing the current asset by current liability.

Current ratio = Current asset / Current liability

Current ratio helps us to analyse the financial statement by measuring the liquidity of the company as it takes into consideration only the current portion of asset and current portion of liabilities. Also current ratio as to measure the forms ability to paint short term liabilities which are due within 1 year.

This means that company having more amount of assets will be easily paying off the current liabilities when they become due. A good current ratio is around 2 which means that the current assets are approximately double the current liabilities which shows that the company is in good position to pay off its liability.

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