Which statement about the current ratio is true?

Which statement about the current ratio is true?

• A. It compares total assets to total liabilities.
• B. It compares current assets to current liabilities and measures liquidity.
• C. It is identical to gross margin.
• D. It uses cash and marketable securities only.

Answer: (B)

The current ratio is a liquidity metric that compares current assets to current liabilities to assess a company’s ability to meet its short-term obligations. That makes the statement that it compares current assets to current liabilities and measures liquidity the best description. Current assets include items like cash, accounts receivable, and inventory—resources expected to be converted to cash within a year. Current liabilities are obligations due within a year. By dividing current assets by current liabilities, you get a sense of how many dollars of short-term assets are available for each dollar of short-term debt—the higher the ratio, the greater the cushion for meeting near-term obligations (though excessively high ratios can signal inefficient use of assets). The other choices mix up different concepts: total assets to total liabilities relates to solvency rather than liquidity; gross margin is a profitability measure; and using only cash and marketable securities describes a stricter measure of liquidity (like the cash ratio), not the current ratio.

The current ratio is a liquidity metric that compares current assets to current liabilities to assess a company’s ability to meet its short-term obligations. That makes the statement that it compares current assets to current liabilities and measures liquidity the best description. Current assets include items like cash, accounts receivable, and inventory—resources expected to be converted to cash within a year. Current liabilities are obligations due within a year. By dividing current assets by current liabilities, you get a sense of how many dollars of short-term assets are available for each dollar of short-term debt—the higher the ratio, the greater the cushion for meeting near-term obligations (though excessively high ratios can signal inefficient use of assets). The other choices mix up different concepts: total assets to total liabilities relates to solvency rather than liquidity; gross margin is a profitability measure; and using only cash and marketable securities describes a stricter measure of liquidity (like the cash ratio), not the current ratio.