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Multiple Choice
Given the following information for XYZ Company: Current Assets = $120,000; Current Liabilities = $80,000. Which of the following best describes XYZ Company's liquidity position?
A
XYZ Company has a weak liquidity position, as its current ratio is 0.67.
B
XYZ Company has a strong liquidity position, as its current ratio is 1.5.
C
XYZ Company is insolvent, as its current liabilities exceed its current assets.
D
XYZ Company has a current ratio of 2.0, indicating excellent liquidity.
Verified step by step guidance
1
Step 1: 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 calculated using the formula: .
Step 2: Identify the values provided in the problem. The current assets are $120,000, and the current liabilities are $80,000.
Step 3: Substitute the given values into the formula for the current ratio: . This will give the numerical value of the current ratio.
Step 4: Interpret the result of the current ratio. A current ratio greater than 1 indicates that the company has more current assets than current liabilities, suggesting a strong liquidity position. Conversely, a ratio less than 1 indicates a weak liquidity position.
Step 5: Compare the calculated current ratio to the options provided in the problem. Use the interpretation of the current ratio to determine which statement best describes XYZ Company's liquidity position.