Chapter 13, Problem 5DQ

To determine

Current ratio: A part of liquidity ratios, current ratio reflects the ability to oblige the short term debts of a company. It is calculated based on the current assets and current liabilities; a company has in an accounting period.

The formula to calculate current ratio is,

  $\text{Current}\text{Ratio}=\frac{\text{Current}\text{Assets}}{\text{Current}\text{Liabilities}}$

Current liability: Every company has some debts or liabilities which need to be paid in less than one year or during current accounting period. Those debts or liabilities are called current liabilities.

Current Assets: Every company has some assets which need to be convertible in less than one year or during current accounting period. Those assets are called current assets.

To identify: The reasons due to which 2:1 might not be the good current ratio.