Where the current ratio measures a company's ability to pay its current debts using current assets on a dollar for dollar basis, working capital provides a similar measure by providing the actual margin of security afforded to short-term creditors.

Question

Quizplus · Accepted Answer

The statement accurately describes the difference between current ratio and working capital as measures of a company's ability to pay its current debts. Current ratio compares current assets to current liabilities, while working capital is the difference between current assets and current liabilities, providing a more specific measure of the margin of safety available to creditors.

Where the Current Ratio Measures a Company's Ability to Pay