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 two accounts are required to calculate a firm's current ratio?

Cash and accounts payable

Total assets and total liabilities

Current assets and current liabilities

Current assets and long-term 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 firm's ability to pay its short-term obligations with its short-term assets. It is calculated as the ratio of current assets to current liabilities.

Identify the components of the current ratio: Current assets include items such as cash, accounts receivable, inventory, and other assets expected to be converted into cash within a year. Current liabilities include obligations such as accounts payable, short-term debt, and other liabilities due within a year.

Recognize the formula for the current ratio: The formula is expressed as:

\frac{Current Assets}{Current Liabilities}

. This formula highlights the relationship between the two accounts required for the calculation.

Eliminate incorrect options: Cash and accounts payable are components of current assets and current liabilities, but they are not the complete accounts needed for the calculation. Total assets and total liabilities represent broader categories that include both current and long-term items, which are not relevant for the current ratio. Current assets and long-term liabilities are mismatched because long-term liabilities are not part of the current ratio calculation.

Conclude with the correct accounts: The two accounts required to calculate the current ratio are current assets and current liabilities, as they directly represent the firm's short-term financial position.