Which ratio is calculated by dividing current assets by current liabilities?

Which ratio is calculated by dividing current assets by current liabilities?

• A. Profit margin
• B. Current ratio
• C. Quick ratio
• D. Receivable turnover

Answer: (B)

The main idea here is liquidity—the ability of a company to meet its short-term obligations using assets that can be turned into cash quickly. The ratio that comes from dividing current assets by current liabilities is called the current ratio. It tells you how many dollars of current assets exist for each dollar of current liabilities, reflecting short-term solvency. A higher current ratio means the company has a larger cushion to cover upcoming obligations; a ratio below 1 suggests potential liquidity stress. For contrast, the quick ratio also measures liquidity but excludes inventories to focus on the most liquid assets, while receivable turnover assesses how efficiently receivables are collected. Profit margin relates to profitability, not liquidity. So dividing current assets by current liabilities identifies the current ratio.

The main idea here is liquidity—the ability of a company to meet its short-term obligations using assets that can be turned into cash quickly. The ratio that comes from dividing current assets by current liabilities is called the current ratio. It tells you how many dollars of current assets exist for each dollar of current liabilities, reflecting short-term solvency. A higher current ratio means the company has a larger cushion to cover upcoming obligations; a ratio below 1 suggests potential liquidity stress. For contrast, the quick ratio also measures liquidity but excludes inventories to focus on the most liquid assets, while receivable turnover assesses how efficiently receivables are collected. Profit margin relates to profitability, not liquidity. So dividing current assets by current liabilities identifies the current ratio.