Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

14. Financial Statement Analysis

Ratios: Working Capital and the Current Ratio

Financial Accounting

14. Financial Statement Analysis

Ratios: Working Capital and the Current Ratio

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Multiple Choice

Which of the following is the formula to calculate the current ratio?

\( \text{Current Ratio} = \frac{\text{Current Liabilities}}{\text{Current Assets}} \)

\( \text{Current Ratio} = \text{Current Assets} - \text{Current Liabilities} \)

\( \text{Current Ratio} = \frac{\text{Total Assets}}{\text{Total Liabilities}} \)

\( \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} \)

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Verified step by step guidance

Understand the concept of the current ratio: The current ratio is a financial metric used to evaluate a company's ability to pay its short-term obligations with its short-term assets. It is a measure of liquidity.

Identify the formula for the current ratio: The correct formula is \( \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} \). This formula divides current assets by current liabilities to determine the ratio.

Clarify the components: Current assets include items like cash, accounts receivable, and inventory that are expected to be converted into cash within a year. Current liabilities include obligations like accounts payable and short-term debt that are due within a year.

Compare the incorrect options: The formula \( \text{Current Ratio} = \text{Current Assets} - \text{Current Liabilities} \) is incorrect because it calculates a difference, not a ratio. Similarly, \( \text{Current Ratio} = \frac{\text{Total Assets}}{\text{Total Liabilities}} \) is incorrect because it uses total assets and liabilities, not current ones.

Apply the formula: To calculate the current ratio, divide the total value of current assets by the total value of current liabilities. This will give you the ratio, which indicates the company's short-term financial health.