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Chapter 19

Liquidity 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 because it compares
current assets with those liabilities due to be paid within 1 year of the statement of
financial position date (otherwise known as current liabilities).

The current ratio is calculated as follows:

Current Assets
Current Liabilities = : 1

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