Question

Two other important ratios are the current ratio and the quick ratio. What are they and what are the differences between them?

Answer 1

Current ratio is a financial ratio which examine the liquidity of company and its ability to pay short term liabilities

with short term assets.The current ratio is calculated by dividing current assets (Cash , inventory,receivables) by current liabilities (debt and payables).

Quick ratio measures the amount of most liquid current assets are there to cover the current liabilities.It is calculated by

adding cash & equivalents ,marketable investments and accounts receivables and dividing that sum by current liabilities.

The main difference between current ratio and quick ratio is that by excluding inventory and other less liquid current assets the quick ratio

focuses on company's more liquid assets.