Which statement best describes the current ratio?

• A. It measures profitability
• B. It indicates ability to meet short-term obligations from liquid assets
• C. It is identical to the quick ratio
• D. It excludes inventory

Answer: (B)

The current ratio is a liquidity measure that shows whether a company has enough assets expected to be converted to cash within a year to cover its short-term obligations. By comparing current assets to current liabilities, it reflects the ability to meet near-term debts using those assets, and it includes all current assets (cash, receivables, inventory, etc.). That’s why the best description is that it indicates the ability to meet short-term obligations from current assets. It’s not about profitability, and it isn’t identical to the quick ratio, which excludes inventory to assess only the most liquid assets.