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sir why do we use current ratio formula?for what its basically used and what we come to know after using it
To know whether or not the business is able to pay its liabilities in the short term.
If the current ratio ever fell below 1 the company would be in desperate problems.
Same idea as the use of the current ratio. It leaves out inventory on the basis that for it to be converted into cash means first selling the inventory and waiting to receive the cash. The problem is that this will probably take longer to get the cash from inventories then the time in which we have to pay liabilities. So again, if the quick ratio is close to or below 1 then the company is likely to face liquidity problems.
It will help you to watch the free lectures on ratios.
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