For Working Capital Funds (WCFs), what is the Current Ratio formula?

For Working Capital Funds (WCFs), what is the Current Ratio formula?

• A. Net income divided by total equity
• B. Cash flow divided by current liabilities
• C. Current assets divided by current liabilities
• D. Total assets divided by total liabilities

Answer: (C)

Liquidity is measured by the current ratio, which compares short-term assets to short-term obligations to see if a fund can cover its near-term debts with assets that can quickly be turned into cash. For working capital funds, this helps ensure day-to-day operations have enough readily available resources. The formula uses current assets divided by current liabilities. Current assets are assets expected to be converted into cash within a year, such as cash, receivables, and inventory. Current liabilities are obligations due within a year, like accounts payable and short-term debt. Interpreting the ratio: if current assets exceed current liabilities, the fund has more liquidity to meet upcoming bills. For example, 2 to 1 (two current assets for every current liability) is generally considered healthy. The other options either describe different concepts: net income divided by total equity is profitability (return on equity); cash flow divided by current liabilities is not the standard current ratio, though it can indicate coverage over liabilities using cash flow; total assets divided by total liabilities is a broad solvency measure, not a focus on short-term liquidity.

Liquidity is measured by the current ratio, which compares short-term assets to short-term obligations to see if a fund can cover its near-term debts with assets that can quickly be turned into cash. For working capital funds, this helps ensure day-to-day operations have enough readily available resources. The formula uses current assets divided by current liabilities. Current assets are assets expected to be converted into cash within a year, such as cash, receivables, and inventory. Current liabilities are obligations due within a year, like accounts payable and short-term debt. Interpreting the ratio: if current assets exceed current liabilities, the fund has more liquidity to meet upcoming bills. For example, 2 to 1 (two current assets for every current liability) is generally considered healthy. The other options either describe different concepts: net income divided by total equity is profitability (return on equity); cash flow divided by current liabilities is not the standard current ratio, though it can indicate coverage over liabilities using cash flow; total assets divided by total liabilities is a broad solvency measure, not a focus on short-term liquidity.