Final answer:
When calculating the current ratio, it is essential to consider current assets and current liabilities. Fixed assets and long-term liabilities are not included in this calculation. The current ratio is calculated by dividing current assets by current liabilities.
Step-by-step explanation:
To calculate the current ratio, which is a measure of a company's liquidity and its ability to meet short-term obligations, the following items must be taken into consideration:
- Current assets: These are all assets that a company expects to convert into cash or use up within one year or one operating cycle, whichever is longer. Current assets typically include cash and cash equivalents, accounts receivable, inventory, marketable securities, and prepaid expenses.
- Current liabilities: These include all obligations a company expects to settle within one year or one operating cycle, like accounts payable, short-term debt, accrued liabilities, and other similar obligations.
On the other hand, you do not consider fixed assets like property, plant, and equipment, or long-term liabilities such as long-term debt or deferred tax liabilities when calculating the current ratio. These are relevant for other financial ratios but not for the current ratio.
To calculate the current ratio, you simply divide current assets by current liabilities. A higher current ratio suggests a better ability of the company to pay its short-term liabilities with its short-term assets.