How to work out the current ratio
The current ratio compares what a business will turn into cash within a year with what it must pay within a year.
Task 1Current assets and current liabilities3 questions
Liquidity is whether a business can pay what it owes in the near future. The figures come from the statement of financial position.
- Current assets
- cash, and things that should turn into cash within a year: inventory, trade receivables, money in the bank
- Current liabilities
- amounts the business must pay within a year: trade payables, VAT owed, a bank overdraft
A van, a machine or the owner's capital is not current. Nor is a loan with nothing to repay for several years.
Task 2The ratio3 questions
Task 3This year against last year2 questions