The Current Ratio = Current Assets/Current Liabilities
Current is defined as assets and liabilities that will be received or paid within the next 12 months or operating cycle.
The ratio is used to give an idea of the company’s ability to pay back its short term
Liabilities(debt and payables) with its short-term assets ( cash, inventory,and receivables).
The standard that most outside users of the financials look for is a ratio of 2 to 1.
The major limitation of the ratio is that you include both receivables and inventory in the calculation of Current Assets. It would seem to me that you would want to back out receivables more than 90 days old and inventory that is obsolete, slow moving, not selling, etc, in order to get a more realistic Current Ratio.
Subscribe to:
Post Comments (Atom)
The easiest way to know double entry bookkeeping would be to realize that every financial transaction includes a double effect. Usually medium and bigger companies make use of a double entry system for recording transactions. Thus, double entry accounting evolves from the truth that every transaction has double effects.
ReplyDeleteHire a CPA Accountants