Utah Contractor Practice Exam

What term describes the comparison of current assets to current liabilities?

1. Current net profit

2. Current ratio

3. Current assets

4. Current liabilities

The correct answer is: Current ratio

The term that describes the comparison of current assets to current liabilities is known as the current ratio. This financial metric is essential for assessing a company's liquidity and its ability to cover its short-term obligations with its short-term assets. A current ratio greater than 1 typically indicates that the company has more current assets than current liabilities, which suggests a healthy financial position. Conversely, a current ratio of less than 1 may signal potential liquidity problems. In the context of financial health, the current ratio is vital for creditors and investors as it provides insight into an organization's short-term financial viability. Understanding and analyzing the current ratio helps stakeholders gauge the risk associated with the company's operational efficiency and financial management.