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Hi All,
I have a confusion regards current ratio – seemingly simple ratio, but here is the confusing part:
a company has deferred income under current liabilities, and also accruals – are they to be included in the ratio? Same for corresponding part in the current assets – we have prepayments there, are they in? The samples in the books i have seen so far only give a generic view of this ratio calculation.As i presume, provisions will definitely go in as their recognition criteria effectively takes them as actual cost?
Thank you very much!
Deferred income will not be settled by the company transferring cash, so exclude. Likewise prepayments will not be cash settled, so exclude. Accruals on the other hand will be settled by transfer of cash or other economic benefit, so include.
Provisions should be included, however bear in mind that provisions must be reasonable (i.e. not aimed at profit smoothing).In short current ratio tries to determine if there is sufficient current assets to meet current liabilities.
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