A current ratio reflects liquidity, or the ability of a company to pay its debts in the short term. Learn how to compute a current ratio.
- An important concern about any company is its liquidity,…or ability to pay its debts in the short run.…If a firm can't meet its obligations in the short run,…it may not survive to enjoy the long run.…The most commonly used measure of liquidity…is the current ratio, which is a comparison…of current assets with current liabilities.…And let me remind you of what a current asset is…and what a current liability is.…A current asset is an asset expected to be used…or turned into cash within one year.…
So, for example, accounts receivable.…That's a current asset because we expect those accounts…to be collected in cash within one year.…Inventory's a current asset because we expect…that inventory to be sold…and then the cash collected all within one year.…Land is not typically a current asset…because if we come back a year from now,…we expect that land to still be here.…Cash is the best current asset because it's already cash.…So, our current assets are the liquid assets,…the ones that we expect to become cash soon,…
Skill Level Beginner
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