What is the purpose of computing the current ratio?
A) To provide investors with some measurement of the returns they can expect from their investment
B) To measure the extent to which a firm is financed through borrowed money
C) To measure how much cash the firm has
D) To measure the firm's ability to meet emergency demands for cash
E) To measure the firm's ability to meet its current obligations out of its current assets

Question

Quizplus · Accepted Answer

The current ratio is used to measure a firm's ability to meet its current obligations out of its current assets. It indicates the extent to which a firm can cover its short-term liabilities with its current assets. A high current ratio indicates that the firm has enough current assets to meet its short-term obligations, while a low current ratio indicates that the firm may have difficulty in meeting its short-term obligations. This is important information for investors or creditors who want to assess the company's financial health and solvency.

What Is the Purpose of Computing the Current Ratio