Current Ratio Formula – What are Current Assets?

Current assets are resources that can quickly be converted into cash within a
year’s time or less. They include the following:

 Cash – Legal tender bills, coins, undeposited checks from customers,

checking and savings accounts, petty cash
 Cash equivalents – Corporate or government securities with 90 days or
less maturity
 Marketable securities – Common stock, preferred stock, government
and corporate bonds with a maturity date of 1 year or less
 Accounts receivable – Money owed to the company by customers and
that is due within a year – This net value should be after deducting an
allowance for doubtful accounts (bad credit)
 Notes receivable – Debt that is maturing within a year
 Other receivables – Insurance claims, employee cash advances, income
tax refunds
 Inventory – Raw materials, work-in-process, finished goods,
manufacturing/packaging supplies
 Office supplies – Office resources such as paper, pens, and equipment
expected to be consumed within a year
 Prepaid expenses – Unexpired insurance premiums, advance payments
on future purchases

Current Ratio Formula – What are Current Liabilities?

Current liabilities are business obligations owed to suppliers and creditors, and
other payments that are due within a year’s time. This includes:

 Notes payable – Interest and the principal portion of loans that will
become due within one year
 Accounts payable or Trade payable – Credit resulting from the purchase
of merchandise, raw materials, supplies, or usage of services and utilities
  Accrued expenses – Payroll taxes payable, income taxes payable, interest
payable, and anything else that has been accrued for but an invoice is
not received
 Deferred revenue – Revenue that the company has been paid for that
will be earned in the future when the company satisfies revenue
recognition requirements

Why Use the Current Ratio Formula?

This current ratio is classed with several other financial metrics known as
liquidity ratios. These ratios all assess the operations of a company in terms of
how financially solid the company is in relation to its outstanding debt.
Knowing the current ratio is vital in decision-making for investors, creditors,
and suppliers of a company. The current ratio is an important tool in assessing
the viability of their business interest.

Other important liquidity ratios include:

 Acid-Test Ratio
 Quick Ratio