How to Calculate Current Ratio (current ratio formula)

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.

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