Future Business Leaders of America (FBLA) Agribusiness Practice Test

What does the current ratio measure?

1. The relationship between current assets and current liabilities

2. A company's net profit margin

3. The total value of assets held

4. The efficiency of inventory management

The correct answer is: The relationship between current assets and current liabilities

The current ratio is a key financial metric used to assess a company's short-term liquidity and overall financial health. It is calculated by dividing current assets by current liabilities. Current assets include cash, accounts receivable, inventory, and other assets that are expected to be converted into cash or used up within one year. Current liabilities are obligations that the company needs to settle within the same time frame, such as accounts payable and short-term debt. By measuring the relationship between current assets and current liabilities, the current ratio provides insight into whether a company has enough resources to cover its short-term obligations. A ratio greater than one suggests that the company has more current assets than current liabilities, indicating a strong liquidity position, while a ratio less than one may signal potential liquidity issues. Understanding the current ratio is crucial for stakeholders, such as investors and creditors, as it reflects the company's ability to manage its short-term financial commitments effectively.