ACCA Financial Management (F9) Certification Practice Exam

Which formula is used for the Current Ratio?

1. Current Assets / Current Liabilities

2. Current Liabilities / Current Assets

3. Total Assets / Total Liabilities

4. Fixed Assets / Current Liabilities

The correct answer is: Current Assets / Current Liabilities

The Current Ratio is a key financial metric used to evaluate a company’s ability to meet its short-term obligations with its short-term assets. The correct formula for this ratio is derived from dividing current assets by current liabilities. Current assets include items that are expected to be converted to cash or used up within one year, such as cash, inventory, and accounts receivable. Current liabilities, on the other hand, are obligations that the company needs to settle within the same timeframe, including accounts payable, short-term loans, and other similar debts. By calculating the Current Ratio using the specified formula, stakeholders can assess whether a company has sufficient resources to cover its short-term liabilities, providing insights into its liquidity and overall financial health. A higher ratio indicates stronger liquidity, as it signifies that the company possesses more current assets relative to its current liabilities. Thus, the formula Current Assets / Current Liabilities is the correct choice when calculating the Current Ratio due to its direct focus on liquidity and short-term financial stability.