Current Ratio Calculation Examples Help

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What is a Current Ratio?

 
Current ratio is one of the most fundamental liquidity ratio. It measures the ability of a business to repay current liabilities with current assets.
 

Current assets are assets that are expected to turn into cash within one year. Examples of current assets include cash and cash equivalents, marketable securities, short-term investments, accounts receivable, short-term portion of notes receivable, inventories and short-term prepayments.
 

Current liabilities are those liabilities that require settlement within one year. Examples of current liabilities include accounts payable, salaries and wages payable, current tax payable, sales tax payable, accrued expenses, etc.
 

Current ratio is calculated using the following formula
Current Ratio = Current Assets/Current Liabilities
 

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Current Ratio Calculation Examples Explanation

 

Let’s understand Current Ratio Calculation with help of an illustration.
Example: Balance Sheet of a company as on 31st Dec 2014.

     

  • Current Liabilities

 

Current tax payable $14000
Security Deposit $10000
Outstanding Salary $6000

     

  • Current Assets

 

Accounts Receivables $12000
Inventories $11000
Cash $25000
 

Solution: Total Current Assets= $12000 + $11000 + $25000= $48000
Total Current Liabilities= $14000 + $10000 + $6000= $30000
Current Ratio = Current Assets/Current Liabilities
= $48000/$30000 = 1.6
The current ratio of the company is healthy and it can meet its current obligation within one operating cycle.
 

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