A firm's ability to pay current liabilities can be evaluated using working capital and the current ratio.

Question

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Working capital is the difference between current assets and current liabilities and indicates whether a company has sufficient funds to pay its short-term debts. The current ratio is calculated by dividing current assets by current liabilities and evaluates a firm's ability to meet short-term obligations. Therefore, both working capital and the current ratio can be used to assess a company's ability to pay current liabilities.

A Firm's Ability to Pay Current Liabilities Can Be Evaluated