What Are the Components of Current Ratio ? - Book Keeping and Accountancy

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What are the components of current ratio ?

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Solution

The current ratio expresses the relationship between a firm's resources (current assets) and its short-term obligations (current liabilities). The formula for computing current ratio is:

Current Ratio = `"Current Assets"/"Current Liabilities"`

The two components involved in current ratio are as follows:

a) Current Assets are those assets that can be easily converted into cash within a short period of time such as cash in hand, cash at bank, marketable securities, debtors, stock, etc.

Current Assets = Total Assets – Fixed Assets or Current Assets = Working Capital + Current Liabilities

b) Current Liabilities are those liabilities that are to be repaid within a period of one year such as bank overdraft, bills payable, provision for tax, outstanding expenses, etc.

Current Liabilities = Total Debts – Long-term Debts or 

Current Liabilities = Current Assets – Working Capital

Concept: Introductions to Current Ratio
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2014-2015 (March)

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