What is the formula for the Current Ratio?

• A. Total Current Assets / Total Current Liabilities
• B. Total Liabilities / Total Assets
• C. Cash / Current Liabilities
• D. Net Working Capital / Current Liabilities

Answer: (A)

The current ratio measures short‑term liquidity by comparing assets expected to be converted to cash within a year to obligations due within the same period. The standard formula uses current assets divided by current liabilities. Current assets include cash, accounts receivable, inventory, and other assets that will be turned into cash or used up within one year. Current liabilities are obligations due within a year, such as accounts payable and short‑term debt. By dividing current assets by current liabilities, you see how many dollars of liquid assets are available for each dollar of near‑term debt. A ratio above 1 indicates more current assets than near‑term liabilities, signaling better liquidity (though the target varies by industry). The other options describe different metrics: liabilities divided by assets is a solvency measure, cash divided by current liabilities ignores other current assets, and net working capital divided by current liabilities uses (current assets minus current liabilities) rather than the straightforward current assets to current liabilities ratio.