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The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.The current ratio is mainly used to give an idea of the company's ability to pay back its liabilities (debt and accounts payable) with its assets (cash, marketable securities, inventory, accounts receivable). As such, current ratio can be used to take a rough measurement of a company’s financial health. The higher the current ratio, the more capable the company is of paying its obligations, as it has a larger proportion of asset value relative to the value of its liabilities.
The current ratio is calculated by dividing current assets by current liabilities. This ratio is stated in numeric format rather than in decimal format. Here is the calculation:
Current Ratio = Current Assets / Current Liabilities
Current Assets
A current asset is cash and any other company asset that will be turning to cash within one year from the date shown in the heading of the company's balance sheet.
Current assets are also referred to as short term assets. Current assets are generally listed first on a company's balance sheet and will be presented in the order of liquidity.
That means they will appear in the following order:
cash (which includes currency, checking accounts, petty cash),
temporary investments, accounts receivable, inventory, supplies, and prepaid expenses. (Supplies and prepaid expenses will not literally be converted to cash.]
Current Liabilities
A current liability is an obligation that is 1) due within one year of the date of a company's balance sheet and 2) will require the use of a current asset or will create another current liability. If a company's operating cycle is longer than one year, current liabilities are those obligation's due within the operating cycle.
Current liabilities are usually presented in the following order:
the principal portion of notes payable that will become due within one year
accounts payable
the remaining current liabilities such as payroll taxes payable, income taxes payable, interest payable and other accrued expenses
The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.The current ratio is mainly used to give an idea of the company's ability to pay back its liabilities (debt and accounts payable) with its assets (cash, marketable securities, inventory, accounts receivable). As such, current ratio can be used to take a rough measurement of a company’s financial health. The higher the current ratio, the more capable the company is of paying its obligations, as it has a larger proportion of asset value relative to the value of its liabilities.
The current ratio is calculated by dividing current assets by current liabilities. This ratio is stated in numeric format rather than in decimal format. Here is the calculation:
Current Ratio = Current Assets / Current Liabilities
Current Assets
A current asset is cash and any other company asset that will be turning to cash within one year from the date shown in the heading of the company's balance sheet.
Current assets are also referred to as short term assets. Current assets are generally listed first on a company's balance sheet and will be presented in the order of liquidity.
That means they will appear in the following order:
cash (which includes currency, checking accounts, petty cash),
temporary investments, accounts receivable, inventory, supplies, and prepaid expenses. (Supplies and prepaid expenses will not literally be converted to cash.]
Current Liabilities
A current liability is an obligation that is 1) due within one year of the date of a company's balance sheet and 2) will require the use of a current asset or will create another current liability. If a company's operating cycle is longer than one year, current liabilities are those obligation's due within the operating cycle.
Current liabilities are usually presented in the following order:
the principal portion of notes payable that will become due within one year
accounts payable
the remaining current liabilities such as payroll taxes payable, income taxes payable, interest payable and other accrued expenses
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