Final answer:
The relationship between current assets and current liabilities is important in evaluating a company's liquidity. By comparing the amount of current assets to current liabilities, analysts can assess whether a company has enough liquid resources to cover its short-term debts. A higher current ratio indicates better liquidity.
Step-by-step explanation:
The relationship between current assets and current liabilities is important in evaluating a company's liquidity. Current assets refer to the assets that can be easily converted into cash within a year, such as cash, inventory, and accounts receivable. Current liabilities, on the other hand, are the obligations or debts that a company expects to pay within a year, such as short-term loans and accounts payable.
A company's liquidity is its ability to meet its short-term obligations using its current assets. By comparing the amount of current assets to current liabilities, analysts can assess whether a company has enough liquid resources to cover its short-term debts. If a company has more current assets than current liabilities, it is considered to have good liquidity.
For example, if a company has $100,000 in current assets and $80,000 in current liabilities, its current ratio (current assets divided by current liabilities) would be 1.25. This indicates that the company has $1.25 of current assets for every $1 of current liabilities, suggesting that it has a healthy liquidity position.