Current ratio

What it means

Current assets divided by current liabilities, a rough test of short-term solvency.

The exam angle

The quick ratio strips out inventory, which is the least liquid current asset and the one most likely to be stale.

Where it appears in the syllabus

• Financial Statement AnalysisCFA Level I · exam weight 11–14% · The three statements, inventories, long-lived assets, quality of earnings.

Related terms

• Accrual accountingRecognising revenue when it is earned and expenses when they are incurred, regardless of when cash moves.
• Balance sheetA statement of what a company owns and owes at a single point in time.
• Book valueThe accounting value of equity: assets less liabilities as reported.
• Cash conversion cycleThe time between paying for inventory and collecting cash from the customer.
• Cash flow from operationsCash generated by the core business, before investment and financing.
• Deferred taxTax arising from timing differences between accounting profit and taxable profit, recognised as an asset or a liability.