Question

Julian and Marcus sit down to discuss the business’s current financial situation. Julian suggests using ratio analysis to identify current strengths and weaknesses. Julian suggests they calculate the current ratio, which is a(n) ______ and is found by _______.

a. Liquidity measure; dividing current assets by current liabilities
b. Profitability measure; multiplying net income by total assets
c. Efficiency measure; subtracting fixed assets from total assets
d. Solvency measure; adding liabilities to equity

Answer 1

The current ratio is a liquidity measure used to assess a business's ability to cover short-term obligations by dividing current assets by current liabilities.

Step-by-step explanation:

The current ratio is indeed a form of liquidity measure, calculated by dividing current assets by current liabilities. Julian's suggestion to calculate the current ratio provides insight into the business's ability to pay off short-term obligations with its short-term assets. This metric is essential for assessing the immediate financial health of the company. The current ratio is not to be confused with other metrics like the profitability measure, efficiency measure, or solvency measure, which analyze different aspects of a business's financial status.