How do you calculate the current ratio?

The current ratio is a financial metric used to assess a company's ability to pay its short-term obligations. This ratio is calculated by dividing current assets by current liabilities. Current assets typically include cash, accounts receivable, and inventory that are expected to be converted into cash or used up within one year. Current liabilities represent obligations that are due within the same time frame.

By taking the ratio of current assets to current liabilities, you obtain a figure that indicates how well the company can cover its short-term liabilities with its short-term assets. A higher current ratio suggests better liquidity and financial health, while a ratio below 1 may indicate potential liquidity issues.

In contrast, the other choices provided do not accurately represent the calculation necessary for the current ratio. Simply adding or subtracting current liabilities from current assets fails to provide a meaningful insight into liquidity. Additionally, using total assets and total liabilities in the calculation shifts focus from short-term obligations and assets to the company's overall financial position, which is not the purpose of the current ratio. Hence, option C clearly reflects the correct methodology for computing this important liquidity measure.