Which calculation expresses a company's ability to cover short-term obligations by comparing current assets to current liabilities?

Which calculation expresses a company's ability to cover short-term obligations by comparing current assets to current liabilities?

• A. Current Ratio Calculation
• B. Encryption
• C. Non-Performing Loan
• D. Agent (re: Conflict of Interest)

Answer: (A)

The main idea here is liquidity, specifically how a company can meet its short-term obligations. The calculation that expresses this is the current ratio, which compares what the company owns in the near term to what it owes in the near term. It’s calculated by dividing current assets by current liabilities. A higher result means more cushion to cover short-term debts—for example, a ratio of 2 indicates two dollars of current assets for every one dollar of current liabilities. Current assets include items like cash, accounts receivable, and inventory, while current liabilities include accounts payable, short-term debt, and accrued expenses. The ratio helps assess whether the company can pay its bills as they come due, though it has limitations since not all assets convert to cash easily and timing can vary. Other terms listed aren’t about measuring liquidity or this type of calculation—encryption is about data security, a non-performing loan relates to credit risk, and a conflict of interest involves governance issues.

The main idea here is liquidity, specifically how a company can meet its short-term obligations. The calculation that expresses this is the current ratio, which compares what the company owns in the near term to what it owes in the near term. It’s calculated by dividing current assets by current liabilities. A higher result means more cushion to cover short-term debts—for example, a ratio of 2 indicates two dollars of current assets for every one dollar of current liabilities.

Current assets include items like cash, accounts receivable, and inventory, while current liabilities include accounts payable, short-term debt, and accrued expenses. The ratio helps assess whether the company can pay its bills as they come due, though it has limitations since not all assets convert to cash easily and timing can vary.

Other terms listed aren’t about measuring liquidity or this type of calculation—encryption is about data security, a non-performing loan relates to credit risk, and a conflict of interest involves governance issues.