Which components are used in calculating the current ratio?

• A. Current assets and current liabilities
• B. Total assets and total liabilities
• C. Shareholders' equity and retained earnings
• D. Net income and dividends

Answer: (A)

The current ratio measures short-term liquidity—the ability to cover upcoming obligations with assets that can be turned into cash within a year. The components used are current assets and current liabilities, because the ratio directly compares assets expected to be converted to cash soon with obligations due soon. Current assets include items like cash, marketable securities, accounts receivable, and inventory, while current liabilities include accounts payable, short-term debt, and accrued expenses. The current ratio is calculated by dividing current assets by current liabilities, with a ratio above 1 generally suggesting the company has more short-term assets than short-term obligations.

The other options don’t fit because they mix items that describe different concepts. Total assets and total liabilities reflect overall size and leverage, not short-term liquidity. Shareholders' equity and retained earnings relate to the owners’ claims on assets, not the company’s ability to meet near-term obligations. Net income and dividends pertain to profitability and distributions, not the balance-sheet snapshot used for the current ratio.