Q. Example of current ratio?

The current assets and current liabilities and current ratios of some other companies as of the third quarter of 2001 were

As you are able to see from these comparisons the current ratios vary a great deal. An old rule of thumb is that the current ratio must be at least 2:1. Though what constitutes an adequate current ratio depends on available lines of credit the cash-generating ability of the company and the nature of the industry in which the company operates. For example companies in the airline industry are able to generate huge amounts of cash on a daily basis and may be able to pay their current liabilities even if their current ratio is less than 1:1. Comparing a company's current ratio with other companies in the similar industry makes sense because all of these companies face about the same economic conditions.

A company with the least current ratio in its industry perhaps unable to pay its short-term obligations on a timely basis unless it can borrow funds from a bank on a line of credit. A company with the uppermost current ratio in its industry may have on hand too many current assets such as cash and marketable securities which could be invested in more productive assets. The next section describes the concepts, assumptions and principles that constitute the accounting theory underlying financial accounting. Therefore accounting theory dictates the standards and procedures applied to the reporting of financial information in the financial statements.