The Current Ratio Is Computed As Total Assets Divided By Total Liabilities. A. True B. False

This statement is “False” as the Current Ratio is calculated by dividing Current Assets by Current Liabilities.

   Current Ratio  =   Current Assets / Current Liabilities

Current assets include Cash and Cash Equivalents, Accounts Receivables, Prepaid Expenses and Accrued Revenues

Current liabilities include Accounts Payable, Accrued Expenses / Outstanding Expenses and Unearned Revenues.

Current ratio is expressed in terms of percentage.

Example: A company doing a retail business. From the financial statement of the company, Current Assets are $3000, Current Liabilities are $200. What is the current ratio?

Given:

                 Current Assets = $3000 | Current Liabilities = $2000

Find:

Current Ratio = ?

We know the formula as shown below:

                              Current Ratio =  Current Assets / Current Liabilities

                                Current Ratio =    $3000 / $2000 = 1.5%

Interpretation:

The ratio shows that for every $1 asset, $0.5 liability is utilized by the business to meet its daily working conditions.