The purpose of the current ratio is to evaluate the firm's ability to
A) generate sales with a given level of current assets.
B) utilize current assets profitably.
C) pay its bills in the short run.
D) effectively use borrowed funds.

Question

Quizplus · Accepted Answer

The current ratio measures a company's ability to pay its bills in the short run, specifically within the next year. A higher current ratio indicates a stronger ability to pay off short-term debts and obligations. It is calculated by dividing current assets by current liabilities. While generating sales and utilizing current assets profitably are important considerations, they are not directly measured by the current ratio. The ability to effectively use borrowed funds is assessed through other financial ratios such as debt-to-equity or interest coverage ratios.

The Purpose of the Current Ratio Is to Evaluate the Firm's