If current assets are $400 and current liabilities are $160, what is the current ratio?

• A. 0.4
• B. 4.0
• C. 2.5
• D. 1.25

Answer: (C)

The current ratio measures liquidity by comparing short-term assets to short-term liabilities. It shows how many dollars of assets you have to cover each dollar of obligations coming due soon. With current assets of 400 and current liabilities of 160, divide 400 by 160 to get 2.5. This means you have $2.50 in current assets for every $1 of current liabilities, indicating a solid short-term cushion. The other numbers don’t fit because 400 ÷ 160 equals 2.5; for example, 0.4 would require assets far smaller than liabilities, 4.0 would need assets of 640, and 1.25 would require assets of 200.