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Chapter 18

Liquidity and efficiency ratios

5.1 The current ratio

This is also known as the working capital ratio, as it is based on working capital or
net current assets. It is a measure of the liquidity of a business entity because it
compares current assets with those liabilities which are due to be paid within 1 year
of the reporting date (otherwise known as current liabilities).

The current ratio is calculated as follows:

Current assets
Current liabilities = : 1

Tutor notes guidance – discussion points

Discuss with students possible explanations for changes in the current ratio.

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