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
C) 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 0.51 appears to be the inverse calculation (current liabilities divided by current assets), which would be $35,000 ÷ $68,000 = 0.51.
Option D: 0.51
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.
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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