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College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

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BuyFindarrow_forward

College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756
Textbook Problem

Name and describe the calculation of two measures that provide an indication of a business’s ability to pay current obligations.

To determine

Name and Describe the calculation of two measures that provide an indication of a business’s ability to pay current obligations.

Explanation

The two measures that provide an indication of a business’s ability to pay current obligations are;

1. Current ratio: The financial ratio which evaluates the ability of a company to pay off the debt obligations which mature within one year or within completion of operating cycle is referred to as current ratio. This ratio assesses the liquidity of a company.

Formula to calculate current ratio:

Current Ratio=Current assetsCurrentliabilities

Uses of current ratio:

  • Higher the current ratio, higher the capacity to pay for short-term liabilities.
  • Current ratio analyzes a company’s potential working capital because current assets and current liabilities are the elements of working capital.
  • The standard of current ratio is 2:1, which means that the company having the current ratio within the standard has good capacity to repay short-term liabilities.
  • Current ratio evaluates the liquidity of a firm as well

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