In short
The current ratio is current assets divided by current liabilities. It measures a company's ability to pay its short-term obligations.
Key takeaways
- The quick (acid-test) ratio excludes inventory and prepaid expenses.
- Paying a current liability with cash raises a ratio above 1 and lowers a ratio below 1.
- Loan covenants often require a minimum current ratio.
Where it's tested
BAR: Financial Statement Analysis — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company with a current ratio of 0.8 uses cash to pay off an accounts payable balance. What is the effect on the current ratio?