What is Current Ratio ?
Current Ratio: Current ratio is the proportion of current assets to current liabilities.
Formula for Current Ratio = Current Assets / Current Liabilities
What does Current Assets includes?
Current assets include current investments, inventories, trade receivables (debtors and bills receivables), cash and cash equivalents, short-term loans and
advances and other current assets such as prepaid expenses, advance tax and accrued income, etc.
What does Current liabilities includes?
Current liabilities include short-term borrowings, trade payables (creditors and bills payables), other current liabilities and short-term provisions.
What is the significance of current Ratio?
- Current Ratio provides the degree to which current assets cover current Liabilities.
- A very high current ratio implies heavy investment in current assets which is not a good sign as it reflects under utilisation or improper utilisation of resources.
- A low ratio endangers the business and puts it at risk of facing a situation where it will not be able to pay its short-term debt on time.
- Ideal Current Ratio is 2.
Now we will look some important MCQ related to Current Ratio that will help Students in clearing doubts if any.
Which ratio is considered as safe margin of solvency?
a) Liquid ratio
b) Current ratio
c) Quick ratio
d) None of the above
Answer: B
What is the ideal level of current ratio?
a) 2:1
b) 3:2
c) 1:1
d) None of the above
Answer: A
Current ratio is stated as a crude ratio because
a) It measures only the quantity of current assets
b) It measures only the quality of current assets
c) Both a and b
d) Offerings dimension
Answer: A
Which of the following is not included in quick assets?
a) Debtors
b) Stock
c) Cash at bank
d) Cash in hand
ANSWER: b) Stock