Question

Current ratio is chiefly used to assess the .

• A. effective utilization of capital
• B. application of debt
• C. liquidity position
• D. levels of inventory piled up in different forms.
• E. prompt payment of long-term liabilities.

Answer 1

Answer: (C)

liquidity position

Current ratio is chiefly used to assess the liquidity position of a company. Let us look at the following example.

Let Current asset = $Rs.100000$ and Current liability = $Rs.50000$

Current ratio = Current asset/Current liability

= $100000/50000$

= $2$

So, if at any given point of time if there is a liquidity crisis then the company has twice the amount of assets to liquidate and pay off the dues.