Question

If the current ratio of a company is 3.0, it means that the company _______

a. will have to sell $3.00 of long-term assets for every dollar that it owes in the next 12 months
b. has $3.00 in current liabilities for every dollar of assets it owns in the next 12 months
c. has $3.00 in current assets for every dollar that it owes in the next 12 months
d. has current assets balance that exceeds its current liabilities balance by $3

Answer 1

The company's current ratio of 3.0 means it has $3.00 in current assets for every dollar of current liabilities. To create a bank's balance sheet and calculate net worth, list assets and liabilities, then subtract liabilities from assets for the net worth.

Step-by-step explanation:

When a company has a current ratio of 3.0, it indicates that the company has $3.00 in current assets for every dollar that it owes in the next 12 months. Therefore, the correct answer is (c) has $3.00 in current assets for every dollar that it owes in the next 12 months.

To illustrate this with an example, if a bank has deposits (liabilities) of $400, it could hold various assets such as reserves of $50, government bonds worth $70, and loans of $500. Setting up a T-account balance sheet for the bank and determining the bank's net worth would involve listing the assets on one side and the liabilities on the other:

Assets:

Reserves: $50

Government Bonds: $70

Loans: $500

Liabilities:

Deposits: $400

The bank's net worth would be calculated as the total assets minus the total liabilities. In the given example, the net worth would be ($50 + $70 + $500) - $400 = $220.