What are the components of current ratio ?
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