Practicing Success
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What is the objective of the Current Ratio? |
To assess the firm's ability to meet its short-term liabilities on time. To assess the ability of the firm to meet its Current Liabilities immediately. To assess the ability of the firm to meet its long-term liabilities. To measure the proportion of total assets funded by the shareholders. |
To assess the firm's ability to meet its short-term liabilities on time. |
CURRENT RATIO provides a measure of degree to which current assets cover current liabilities. The excess of current assets over current liabilities provides a measure of safety margin available against uncertainty in realisation of current assets and flow of funds. The ratio should be reasonable. It should neither be very high or very low. Both the situations have their inherent disadvantages. A very high current ratio implies heavy investment in current assets which is not a good sign as it reflects under utilisation or improper utilisation of resources. A low ratio endangers the business and puts it at risk of facing a situation where it will not be able to pay its short-term debt on time. If this problem persists, it may affect firm’s credit worthiness adversely. Normally, it is safe to have this ratio within the range of 2:1. |
