Current ratio

From Wikicpa

Jump to: navigation, search

The current ratio is a comparison of a firm's current assets to its current liabilities.


\mbox{Current Ratio} = \frac {\mbox{Current Assets}} {\mbox{Current Liabilities}}


The current ratio is an indication of a firm's market liquidity and ability to meet short-term debt obligations. Acceptable current ratios vary from industry to industry, but a current ratio between 1 and 1.5 is considered standard. If a company's current assets are in this range, then it is generally considered to have good short-term financial strength. If current liablities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations. If the current ratio is too high, then the company may not be efficiently utilizing its current assets.

[edit]

Example

For example, if Boxcarr Company's current assets are $60,000 and its current liabilities are $45,000, then its current ratio would be $60,000 divided by $45,000, which equals 1.333

Retrieved from "http://www.wikicpa.com/index.php/Current_ratio"
Personal tools