ASU ACC241 Uses Of Accounting II Exam 3 Practice

How is the current ratio calculated?

Current assets divided by current liabilities. Total revenues divided by total expenses. Shareholders' equity divided by total assets. Net income divided by total sales.

Correct Answer:

Current assets divided by current liabilities.

Explanation:

The current ratio measures a company's ability to cover its short-term obligations with its short-term assets. It is calculated by dividing current assets by current liabilities. This ratio is a liquidity ratio and provides insights into the financial health of a business, specifically its short-term financial stability. A higher current ratio indicates that a company has a greater capacity to pay off its current liabilities, which is a positive sign for creditors and investors. This key metric is essential for assessing how well a company can meet its obligations without needing to secure additional financing or sell long-term assets. The other options pertain to different financial concepts, which do not relate to the calculation of the current ratio.

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