The current ratio is calculated by dividing current assets by current liabilities. Which two components are used in this calculation?

• A. Quick ratio
• B. Profit margin
• C. Receivable turnover
• D. Current assets and current liabilities

Answer: (D)

The main idea here is liquidity: the current ratio shows how well a company can cover its short-term obligations with assets that can be turned into cash within a year. The two components used are current assets and current liabilities. Current assets include items like cash, accounts receivable, and inventory, while current liabilities include obligations such as accounts payable and short-term debt. The other options describe different concepts: the quick ratio adjusts current assets by excluding inventory, profit margin is about profitability, and receivable turnover measures how quickly receivables are collected.