How is the current ratio calculated?

The current ratio is a financial metric used to evaluate a company's ability to pay its short-term obligations. It is calculated by dividing the current assets by the current liabilities. Current assets are assets that are expected to be converted into cash or used within one year, such as cash, accounts receivable, and inventory. Current liabilities, on the other hand, are obligations that the company needs to settle within a year, including accounts payable and short-term debt.

This ratio helps stakeholders assess the liquidity position of a business, indicating whether the company has enough short-term assets to cover its short-term liabilities. A current ratio of more than one suggests that the company has more current assets than current liabilities and is in a good position to cover its short-term debts.

In contrast, the other options presented do not accurately represent the current ratio. For example, dividing current liabilities by current assets would provide a measure of how much liability exists for every dollar of assets, but it does not indicate liquidity. Similarly, calculating current assets divided by total liabilities or total assets divided by current liabilities would yield metrics that do not specifically assess the company's short-term solvency. Each of these alternative calculations represents different financial ratios, such as the debt-to-equity ratio or the quick ratio,