The current ratio computes the relationship between:

• A. total assets and total liabilities
• B. current assets and total equity
• C. current liabilities and long-term liabilities
• D. current assets and current liabilities

Answer: (D)

Verified step by step guidance

1. Understand the concept of the current ratio: The current ratio is a financial metric used to evaluate a company's ability to pay its short-term obligations with its short-term assets. It is calculated by dividing current assets by current liabilities.
2. Identify the components of the formula: Current assets include items such as cash, accounts receivable, and inventory, while current liabilities include obligations like accounts payable, short-term debt, and accrued expenses.
3. Write the formula for the current ratio: $\frac{\mathrm{Current Assets}}{\mathrm{Current Liabilities}}$
4. Interpret the result: A higher current ratio indicates better liquidity, meaning the company is more capable of meeting its short-term obligations. A ratio below 1 suggests potential liquidity issues.
5. Apply the formula to a given scenario: To compute the current ratio, gather the values for current assets and current liabilities from the company's balance sheet and substitute them into the formula.