It is quite
easy and simple to calculate the current ratio (with current ratio formula) of a firm provided the current
assets and current liabilities of the firm. As current ratio is a ratio between
the assets and liabilities its formula is represented as below:-

**Current Ratio = Current Assets/ Current Liabilities**

Another representation of the formula of the current ratio is

**Current Ratio = Current Assets: Current Liabilities**

The above mentioned formula show that in order to obtain
current ratio we have to divide the total current assets with the total current
liabilities. The figures of assets and the liabilities are obtained from the
balance sheet of the company in order to calculate current ratio.

In order to understand the concept of current assets and
current liabilities in comparison to the long term assets and long term
liabilities lets calculate current ratio with the help of some examples.

Example 1:-

A company has current assets of $100,000 and current
liabilities of $50,000. Calculate current ratio

**Current Ratio**= Total Current Assets/ Total Current Liabilities

**Current Ratio**= 100,000/50,000

**Current Ratio**=2

Example No 2

A company has total assets of 150,000 dollars, equity of
75,000 dollars and non-current assets of 50,000 dollars and non-current
liabilities of 50,000 dollars. Calculate the current ratio of the company.

Now in order to calculate the current ratio we need to
calculate current assets and current liabilities at that point. To calculate
current assets we have to subtract non- current assets from the total assets. To
calculate the total liabilities we need to subtract total equity from the total
assets. In order to calculate the current liabilities we need to subtract non-current
liabilities from total liabilities.

**Current Assets**= Total Assets – Non-Current Assets

**Current Assets**= $150,000 - $50,000

**Current Assets**= $100,000

**Total Liabilities**= Total Assets – Total Equity

**Total Liabilities**= $150,000 - $75,000

**Total Liabilities**= $ 75,000

**Current Liabilities**= Total Liabilities – Non Current Liabilities

**Current Liabilities**= 75,000 – 50,000

**Current Liabilities**= $25,000

**Current Ratio**= Current Assets/ Current Liabilities

**Current Ratio**= 100,000/ 25,000

**Current Ratio**= 4

An acceptable current ratio varies from industry to industry
and business to business. For most of the companies current ratio from 1.5 to 2
is acceptable and satisfactory. However, current ratio less than one indicate
that there are liquidity issues in the firm and the firm must be concerned.
Current ratio of above three indicates that management has access cash in hand
and they are unable to invest it properly.