THE CURRENT RATIO NON-SENSE PARADOX – AND HOW TO FIX IT

Abstract

We aim for presenting a theoretical stringent version of the common current ratio. Existing accounting regulation prescribes using the going concern concept perspective and provides the measurement basis for a company's current assets and current liabilities, that make it questionable what is measured by the current ratio. Thus, we suggest using fair value as a common measurement basis for this ratio, since stringent use of fair value and fair value proxies provides adjusted current ratio values that differ from traditional current ratio values, but in return the conclusions based on the numbers are concise, understandable, reliable, and theoretically credible, no matter whether we use a normative or positive approach in our financial analysis.

Our suggestion is a unique modification which eliminates a theoretical lapsus, and thus improves financial analysis since it is easily adapted by analysts using normative current ratio heuristics to the benefit of all accounting users seeking faithful information on companies' financial health.