ACCA Financial Management (F9) Certification Practice Exam

What formula is used to calculate the current ratio?

1. (Current Assets - Inventory) / Current Liabilities

2. Current Assets / Current Liabilities

3. Current Liabilities / Current Assets

4. Inventory / Current Liabilities

The correct answer is: Current Assets / Current Liabilities

The current ratio is a financial metric used to assess a company's ability to pay short-term obligations with its short-term assets. The formula for calculating the current ratio is simply the total current assets divided by the total current liabilities. This ratio provides insight into the liquidity position of a company, highlighting whether it has enough assets on hand to cover its liabilities. By using the current assets in the numerator, which encompasses cash, accounts receivable, and inventory, and dividing this by current liabilities, which includes accounts payable and other short-term obligations, the current ratio gives a clear picture of financial health. A current ratio greater than one typically indicates that a company has more current assets than current liabilities, suggesting a good short-term financial position. This measure is essential for stakeholders, including investors and creditors, as it demonstrates a company’s liquidity and operational efficiency.