Definition
The current ratio is total current assets divided by total current liabilities. A result above 1.0 means current assets exceed obligations due within the operating cycle or one year, whichever is longer. The ratio depends entirely on how items are classified, so it is only as reliable as the balance sheet split between current and noncurrent.
Why it matters in an audit or review
Auditors compute it in planning and again at the overall review stage under AU-C 520. A sharp drop can point to going concern doubt, debt that belongs in current liabilities, or unrecorded liabilities. Credit agreements often set a minimum ratio, and a breach can force long-term debt into current liabilities.
Example
Illustrative: current assets of $1,250,000 and current liabilities of $800,000 give a ratio of 1.56. If a $300,000 loan is reclassified to current because of a covenant breach, current liabilities become $1,100,000 and the ratio falls to 1.14.
Common mistakes
- Including restricted cash or long-term receivables in current assets.
- Mixing the lender's covenant definition with the GAAP classification.
FAQ
What is a good current ratio?
There is no universal figure. Compare the ratio with prior years, the industry, and any covenant minimum, and look at what makes up each side.
Sources
- FASB ASC 210-10, Balance Sheet, Overall (definitions and classification of current assets and current liabilities)
- AICPA, AU-C Section 520, Analytical Procedures
- SEC, Regulation S-X Rule 5-02, Balance sheets (17 CFR 210.5-02, ecfr.gov)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error