ACCA Financial Management (F9) Certification Practice Exam

Which of the following calculations helps assess liquidity for an organization?

1. Accounting Rate of Return

2. Internal Rate of Return

3. Current Ratio

4. Return on Investment

The correct answer is: Current Ratio

The current ratio is a key financial metric used to assess an organization's liquidity. It measures the ability of a company to cover its short-term liabilities with its short-term assets. The current ratio is calculated by dividing current assets by current liabilities. A ratio greater than 1 indicates that the organization has more current assets than current liabilities, suggesting it is in a good position to meet its short-term obligations. This ratio is particularly important for stakeholders, such as creditors and investors, as it provides insights into the company’s financial health and operational efficiency in managing its resources. By examining the current ratio, stakeholders can determine whether the organization has sufficient liquidity to manage unexpected expenses or challenges. In contrast, the accounting rate of return, internal rate of return, and return on investment focus primarily on profitability and investment returns rather than liquidity. They measure the effectiveness of investments and profitability rather than the short-term financial health represented by liquidity ratios. Thus, while they are vital for different financial assessments, they do not provide insights into a company's capability to pay its current liabilities.