Future Business Leaders of America (FBLA) Agribusiness Practice Test

What does the current ratio measure?

1. The extent to which current assets cover current liabilities

2. The total amount of short-term debts

3. The total assets owned by a business

4. The financial performance of a business

The correct answer is: The extent to which current assets cover current liabilities

The current ratio measures the extent to which a company's current assets can cover its current liabilities. This financial metric is crucial for assessing a business's short-term liquidity and operational efficiency. A higher current ratio indicates that the company is in a better position to meet its short-term obligations, which can be essential for maintaining operations and avoiding potential financial distress. Current assets typically include cash, accounts receivable, and inventory that are expected to be converted into cash or used up within one year. Current liabilities consist of debts or obligations that are due within the same time frame. By comparing these two figures, the current ratio provides insights into a business's ability to manage its short-term debts with its available resources. Understanding the current ratio is vital for stakeholders, including investors and creditors, as it reflects the company's financial health and ability to sustain operations without relying on long-term financing or selling assets.