Question

current ratio definition and how to calculate

Answer 1

Current ratio: Current ratio measures liquidity of the firm. It measures whether the firm has sufficient amount of current assets available to pay its short term obligations or current liabilities. The fomula for calculating current ratio is:

Current ratio = Current assets / Current liabilities

where, current assets are assets that will be realized or converted into cash within one year examples include cash, inventories, accounts receivable, short term investments

and current liabilities are liabilities that will be settled or paid into cash within one year, examples include accounts payable, accruals, expenses payable etc.

Usually, a current ratio of 2 is said to be satisfactory.