The current ratio is computed by:

Question

Quizplus · Accepted Answer

The current ratio is a liquidity ratio that measures a company's ability to pay its short-term debts with its current assets. It is computed by dividing current assets by current liabilities, which gives an indication of how well a company can cover its short-term obligations. Choice A is incorrect because dividing current assets by non-current assets does not provide a meaningful ratio for liquidity analysis. Choice B is incorrect because dividing current liabilities by current assets yields the reciprocal of the current ratio, which is not generally used for financial analysis. Choice D is incorrect because dividing current assets by non-current liabilities mixes short-term and long-term items and does not provide a relevant liquidity measure.

The Current Ratio Is Computed By