Which ratio is defined as current assets divided by current liabilities?

• A. Debt-to-equity ratio
• B. Asset turnover
• C. Current ratio
• D. Quick ratio

Answer: (C)

Liquidity is being tested here. The current ratio is defined as current assets divided by current liabilities, and it directly measures how well a company can cover its short-term obligations with assets expected to be converted to cash within a year. Current assets include items like cash, accounts receivable, and inventory, while current liabilities include accounts payable and short-term debt. If the ratio is greater than 1, there’s more in current assets than current liabilities, indicating better short-term liquidity. The quick ratio is a related measure but excludes inventory, focusing on the most liquid assets. Debt-to-equity looks at financing structure, and asset turnover assesses how efficiently assets generate sales, not immediate liquidity. For example, if current assets are $400,000 and current liabilities are $200,000, the current ratio is 2.0, signaling strong short-term liquidity.