### ZIMSEC O Level Principles of Accounting: Introduction to Liquidity Ratios: Current Asset Ratio

• As pointed out in the introduction
• One of the liquidity ratios that you need to be familiar with is the Current Asset Ratio
• Like all liquidity ratios it measures how well a business will be able to settle its short term obligations as and when they fall due
• It specifically measures how well current assets cover current liabilities
• The ratio is calculated using the formula:
• $\mathrm{Current \quad Ratio = \dfrac{Current\quad Assets}{Current\quad Liabilities}}$
• For example let us say we have current assets of $3 000 and current liabilities of$ 1 500
• The ratio would be calculated as follows:
• $\mathrm{\dfrac{3000}{1500}}$
• 2
• This means for every $1 in fixed there is$2 in current assets
• In other terms there is twice as many current assets as there are current liabilities
• The ratio is expressed as a number in decimal terms
• Generally the current asset should be between 1.5 and 2
• If it is any lower than this it means there is a real chance the business will face difficulties when trying to pay its creditors
• If it is higher than this it means a lot of resources are tied up in the form of current assets
• One drawback of the ratio is that it incorporates the inventory/stock in the formula
• In the real world it might be difficult to quickly sale stock/inventory in order to settle current liabilities when creditors come calling
• A more stringent measure the excludes stock might be needed in such instances
• This ratio is known as the Acid Test Ratio