Liquidity Ratio Notes
1. What are liquidity ratios?
the ratio between the liquid assets and the liabilities of a bank or other institution.
2. What is a current ratio and what is the formula?
divide the company's current assets by its current liabilities. Current assets are those that can
be converted into cash within one year, while current liabilities are obligations expected to be
paid within one year.
3. A business has current assets totalling $500 000 while its current liabilities amount to
$250 000. What is its current ratio?
500000/250000=2
4. What does this ratio indicate?
a firm's ability to pay off its short-term liabilities with its current assets
5. What are ways to improve the current ratio?
Selling any capital assets that are not generating a return to the business (use cash to
reduce current debt).