Ratios: Working Capital and the Current Ratio quiz #1 Flashcards
Ratios: Working Capital and the Current Ratio quiz #1
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What is the formula for the current ratio, and what does a current ratio below 1.0 indicate about a company's liquidity?
The current ratio is calculated as current assets divided by current liabilities. A current ratio below 1.0 indicates liquidity problems, meaning the company has less current assets than current liabilities and may struggle to meet its short-term obligations. How is working capital calculated, and what does positive working capital signify for a company?
Working capital is calculated as current assets minus current liabilities. Positive working capital signifies that a company can cover its short-term liabilities, indicating short-term financial stability. Why might excessive working capital be considered inefficient, and what could a company potentially do with surplus current assets?
Excessive working capital may indicate inefficient asset management, as the company could be holding too many assets that are not being used productively. The company could potentially invest surplus current assets in long-term assets or other opportunities to generate higher returns. Given a company with current assets of $450,000 and current liabilities of $315,000, calculate the current ratio and working capital. What do these results suggest about the company's short-term financial health?
The current ratio is $450,000 ÷ $315,000 = 1.43. Working capital is $450,000 - $315,000 = $135,000. These results suggest the company is in good short-term financial health, as it has more than enough current assets to cover its current liabilities. What is the formula for the current ratio and what does it measure?
The current ratio is calculated as current assets divided by current liabilities. It measures how many dollars of current assets are available for each dollar of current liabilities. What does a current ratio below 1.0 indicate about a company's liquidity?
A current ratio below 1.0 indicates liquidity problems, meaning the company has less current assets than current liabilities and may struggle to meet its short-term obligations. How is working capital calculated and what does positive working capital signify?
Working capital is calculated as current assets minus current liabilities. Positive working capital signifies that a company can cover its short-term liabilities, indicating short-term financial stability. What might negative working capital suggest about a company's short-term financial health?
Negative working capital suggests potential short-term financial problems, as the company does not have enough current assets to cover its current liabilities. Why might excessive working capital be considered inefficient for a company?
Excessive working capital may indicate inefficient asset management, as the company could be holding too many assets that are not being used productively. The company could potentially invest surplus current assets in long-term assets or other opportunities to generate higher returns. Given current assets of $450,000 and current liabilities of $315,000, what are the current ratio and working capital, and what do they indicate?
The current ratio is $450,000 ÷ $315,000 = 1.43, and working capital is $450,000 - $315,000 = $135,000. These results suggest the company is in good short-term financial health, as it has more than enough current assets to cover its current liabilities.
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