Question

With the following amounts, calculate the company's current ratio. Round to two decimal places. Compare the ratios in each situation to determine which has the strongest position.

a. Current assets of 17,500 and current liabilities of 13,050
b. Total assets of 22,780, fixed assets of 5,760, and current liabilities of 16,900
c. Total liabilities of 17,900, current assets of 10,980, and long-term debt of 10,200

Answer 1

The current ratio is calculated by dividing current assets by current liabilities. The highest current ratio indicates the strongest position to pay short-term obligations, with scenario c being the strongest at a ratio of 1.43.

Step-by-step explanation:

To calculate the current ratio, divide current assets by current liabilities. The current ratio is a liquidity ratio that indicates a company’s ability to pay short-term obligations.

1. For scenario a, the calculation would be 17,500 / 13,050, giving a current ratio of 1.34.
2. Scenario b requires finding current assets first by subtracting fixed assets from total assets, which gives 22,780 - 5,760 = 17,020. The current ratio is then 17,020 / 16,900, resulting in a ratio of 1.01.
3. For scenario c, with current liabilities not given directly, we must subtract long-term debt from total liabilities to find current liabilities, which is 17,900 - 10,200 = 7,700. Then we can calculate the current ratio as 10,980 / 7,700 equalling 1.43.

The scenario with the highest current ratio is the strongest, so scenario c has the strongest position with a current ratio of 1.43.