The current ratio is a liquidity ratio that measures whether a company has enough resources to meet its short-term obligations.
Short term obligation refers to any financial obligation that is due within the next 12 months period or fiscal year. It compares a company’s current assets to its current liabilities.
Current Assets-any asset that can be converted into cash value within the next 12 months.
Current Liabilities- amounts due to be paid to creditors within 12 months.
Current Ratio=Current Assets/Current Liabilities
What would be the current ratio for a construction company with equipment worth $190,000, an inventory worth $15,000, a checking account with $99,000, payroll taxes of $11,000, and a long-term note payable for $132,000?
The key to answering this question is to differentiate between current and fixed assets, as well as between current and long-term liabilities. Inventory and Cash (checking account is the same as cash) add up to $114,000 ($114,000 comes from adding $15,000 and $99,000). Payroll taxes payable is the only current liability listed and is equal to $11,000. When we divide $114,000 by $11,000.