A contractor has the following current assets: Cash $15,000, Accounts Receivable $45,000, Inventory $8,000. Current liabilities total $35,000. What is the current ratio?
Correct Answer
A) 1.94
Current ratio = Current Assets ÷ Current Liabilities. Total current assets = $15,000 + $45,000 + $8,000 = $68,000. Current ratio = $68,000 ÷ $35,000 = 1.94.
Why This Is the Correct Answer
The current ratio is calculated by dividing total current assets by total current liabilities. Current assets include cash ($15,000), accounts receivable ($45,000), and inventory ($8,000), totaling $68,000. When divided by current liabilities of $35,000, this gives us 1.94. This ratio indicates the company has $1.94 in current assets for every $1.00 of current liabilities.
Why the Other Options Are Wrong
Option B: 1.29
This answer of 1.29 would result from an incorrect calculation, possibly from omitting one of the current asset categories or making an arithmetic error in the division.
Option C: 2.15
This answer of 2.15 is too high and would result from either overstating current assets or understating current liabilities in the calculation.
Option D: 0.51
This answer of 0.51 appears to be the inverse calculation (current liabilities divided by current assets), which would be $35,000 ÷ $68,000 = 0.51.
Memory Technique
Remember 'CARI' for Current Assets: Cash, Accounts Receivable, Inventory (plus any prepaid expenses). Current ratio = Current Assets ÷ Current Liabilities.
Reference Hint
Business and Finance chapter, specifically the section on Financial Ratios and Liquidity Analysis
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