What does the current ratio compare?

What does the current ratio compare?

• A. Total Assets to Total Liabilities
• B. Current Assets to Current Liabilities
• C. Net Income to Shareholders’ Equity
• D. Gross Profit to Net Profit

Answer: (B)

The current ratio is a liquidity measure that shows a business’s ability to meet short-term obligations. It uses current assets—items expected to be converted to cash within a year, such as cash, accounts receivable, and inventory—divided by current liabilities—obligations due within a year like accounts payable and short-term debt. This ratio helps gauge whether there are enough short-term resources to cover upcoming bills; a value above 1 indicates more current assets than current liabilities, while a value below 1 suggests potential liquidity concerns. Other options describe different concepts: total assets to total liabilities looks at overall solvency, net income to shareholders’ equity measures profitability, and gross profit to net profit compares profitability at different stages, not short-term liquidity.

The current ratio is a liquidity measure that shows a business’s ability to meet short-term obligations. It uses current assets—items expected to be converted to cash within a year, such as cash, accounts receivable, and inventory—divided by current liabilities—obligations due within a year like accounts payable and short-term debt. This ratio helps gauge whether there are enough short-term resources to cover upcoming bills; a value above 1 indicates more current assets than current liabilities, while a value below 1 suggests potential liquidity concerns. Other options describe different concepts: total assets to total liabilities looks at overall solvency, net income to shareholders’ equity measures profitability, and gross profit to net profit compares profitability at different stages, not short-term liquidity.