   Chapter 15, Problem 2RQ

Chapter
Section
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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