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The following table contains selected financial information for Tougher Question, Inc.
Calculate the current ratio and working capital for TQ, Inc.
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14. Financial Statement Analysis
Ratios: Working Capital and the Current Ratio
Multiple Choice
Which of the following ratios are equivalent to a current ratio of 2:1?
A
5:3
B
3:2
C
6:3
D
4:2
Verified step by step guidance1
Understand the concept of the current ratio: The current ratio is a financial metric that measures a company's ability to pay its short-term obligations with its short-term assets. It is calculated as Current Assets ÷ Current Liabilities.
Interpret the given ratio of 2:1: A current ratio of 2:1 means that for every 1 unit of current liabilities, there are 2 units of current assets.
Compare the given ratios to the equivalent of 2:1: To determine equivalence, simplify each ratio to its lowest terms and check if it matches the proportion of 2:1.
Simplify each ratio: For example, simplify 6:3 by dividing both terms by their greatest common divisor (GCD), which is 3. This results in 2:1. Similarly, simplify 4:2 by dividing both terms by their GCD, which is 2, resulting in 2:1.
Conclude which ratios are equivalent: After simplification, identify that 6:3 and 4:2 are equivalent to the current ratio of 2:1, while 5:3 and 3:2 are not equivalent.
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