Question

The current ratio is typically measured against a standard of:

A) 1 to 1

B) 2 to 1

C) 1 to 2

D) 2 to 2

Answer 1

Option B is the answer.

Explanation :-

Current Ratio = [Current Assets / Current Liabilities]

Current Assets includes Cash in hand,Cash at Bank, Sundry Debtors, Bills Receivable, Short-termInvestments, Prepaid Expenses, Accrued Incomes etc.

Current Liabilities include SundryCreditors, Bills Payable, Bank Overdraft, Outstanding Expensesetc.

Current ratio shows the short-term financial position of thebusiness. This ratio measures the ability of the business topay its current liabilities. The Ideal CurrentRatio is supposed to be 2:1 i.e. Current assets mustbe twice the current liabilities. In case, this ratio is lessthan 2:1, the short-term financial position is not supposed to bevery sound and in case, it is more than 2:1, it indicates idlenessof working capital.