Which of the following best describes the current ratio?

Which of the following best describes the current ratio?

• A. The ratio of current assets to current liabilities
• B. The ratio of total assets to total liabilities
• C. The ratio of net income to revenue
• D. The ratio of cash to accounts payable

Answer: (A)

The current ratio measures liquidity: whether the farm business has enough short-term assets to cover its short-term obligations. It’s calculated by dividing current assets by current liabilities. So the description that fits best is the ratio of current assets to current liabilities. Interpreting it, a value above 1 means there are more current assets than current liabilities, indicating the ability to meet short-term debts; very high values can suggest excess idle cash, while values below 1 warn of potential short-term liquidity problems. The other options describe different concepts: total assets to total liabilities is a solvency measure, net income to revenue is profitability, and cash to accounts payable isn’t a standard, meaningful liquidity ratio.

The current ratio measures liquidity: whether the farm business has enough short-term assets to cover its short-term obligations. It’s calculated by dividing current assets by current liabilities. So the description that fits best is the ratio of current assets to current liabilities. Interpreting it, a value above 1 means there are more current assets than current liabilities, indicating the ability to meet short-term debts; very high values can suggest excess idle cash, while values below 1 warn of potential short-term liquidity problems. The other options describe different concepts: total assets to total liabilities is a solvency measure, net income to revenue is profitability, and cash to accounts payable isn’t a standard, meaningful liquidity ratio.