Final Answer:
The correct formula to calculate the current ratio is A. Current assets / Current liabilities.
Step-by-step explanation:
a. The current ratio measures a company's ability to cover its short-term liabilities with its short-term assets. It's calculated by dividing the current assets by the current liabilities. Current assets are those that can be converted into cash within a year, including cash, accounts receivable, and inventory. Current liabilities are obligations due within a year, such as accounts payable and short-term debt.
Let's say a company has $100,000 in current assets and $50,000 in current liabilities. Applying the formula: Current Ratio = Current assets / Current liabilities = $100,000 / $50,000 = 2. This means the company has $2 in current assets for every $1 in current liabilities. A higher current ratio generally indicates a stronger financial position, as the company has more assets to cover its short-term obligations.
Understanding this ratio is crucial for investors, creditors, and analysts to assess a company's liquidity and its ability to meet short-term obligations. It provides insights into a company's financial health and its capability to manage short-term financial commitments.
In conclusion, using the formula A. Current assets / Current liabilities correctly computes the current ratio, which is a fundamental metric in evaluating a company's liquidity and financial stability.