Which statement best describes the current ratio?

Which statement best describes the current ratio?

• A. It measures profitability
• B. It indicates ability to meet short-term obligations from liquid assets
• C. It is identical to the quick ratio
• D. It excludes inventory

Answer: (B)

The current ratio is a liquidity measure that shows whether a company has enough assets expected to be converted to cash within a year to cover its short-term obligations. By comparing current assets to current liabilities, it reflects the ability to meet near-term debts using those assets, and it includes all current assets (cash, receivables, inventory, etc.). That’s why the best description is that it indicates the ability to meet short-term obligations from current assets. It’s not about profitability, and it isn’t identical to the quick ratio, which excludes inventory to assess only the most liquid assets.

The current ratio is a liquidity measure that shows whether a company has enough assets expected to be converted to cash within a year to cover its short-term obligations. By comparing current assets to current liabilities, it reflects the ability to meet near-term debts using those assets, and it includes all current assets (cash, receivables, inventory, etc.). That’s why the best description is that it indicates the ability to meet short-term obligations from current assets. It’s not about profitability, and it isn’t identical to the quick ratio, which excludes inventory to assess only the most liquid assets.