Which measure compares current assets to current liabilities?

Which measure compares current assets to current liabilities?

• A. Debt Ratio
• B. Current Ratio
• C. Net Profit on Sales Ratio
• D. Working Capital

Answer: (B)

Current ratio is a liquidity measure that compares current assets to current liabilities by dividing them. It directly shows how well assets expected to be converted to cash in the near term cover obligations due within the same period. Current assets include items like cash, accounts receivable, and inventory, while current liabilities include accounts payable and short-term debt. This ratio is the best answer because it specifically expresses the proportion of assets available to meet short-term obligations. In contrast, working capital is just the difference between current assets and current liabilities, not a ratio; the debt ratio looks at total liabilities relative to total assets, and net profit on sales measures profitability, not liquidity. For example, if current assets are $200,000 and current liabilities are $100,000, the current ratio is 2.0, signaling strong short-term liquidity.

Current ratio is a liquidity measure that compares current assets to current liabilities by dividing them. It directly shows how well assets expected to be converted to cash in the near term cover obligations due within the same period. Current assets include items like cash, accounts receivable, and inventory, while current liabilities include accounts payable and short-term debt. This ratio is the best answer because it specifically expresses the proportion of assets available to meet short-term obligations. In contrast, working capital is just the difference between current assets and current liabilities, not a ratio; the debt ratio looks at total liabilities relative to total assets, and net profit on sales measures profitability, not liquidity. For example, if current assets are $200,000 and current liabilities are $100,000, the current ratio is 2.0, signaling strong short-term liquidity.