Certified Valuation Analyst (CVA) Practice Exam

What is a fundamental feature of a current ratio?

1. To predict future sales

2. To measure liquidity

3. To assess profitability

4. To evaluate market share

The correct answer is: To measure liquidity

A fundamental feature of the current ratio is its role in measuring liquidity. The current ratio is calculated by dividing a company's current assets by its current liabilities, providing insight into the firm's ability to pay off its short-term obligations with its short-term assets. A higher current ratio indicates a stronger liquidity position, suggesting that the company can easily meet its upcoming financial commitments. In contrast, predicting future sales, assessing profitability, and evaluating market share focus on different aspects of a business's performance. Predicting future sales typically involves market analysis and forecasting techniques that are not captured by the current ratio. Assessing profitability, on the other hand, relates to the relationship between revenues and expenses but is not directly tied to the current ratio, which does not consider income or expenses. Lastly, evaluating market share involves comparing a company's sales to total sales in the market, which is again outside the scope of what the current ratio addresses.