Accounting: 1,001 Practice Problems For Dummies
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When you know a company's current assets and liabilities, you can use this information to measure the company's ability to pay its current obligations. To do this, you first need to calculate the company's current ratio.

The formula for calculating the current ratio is current assets divided by current liabilities.

The following practice questions give you a quick introduction to current ratios.

Practice questions

  1. A company has current assets of $500,000 and current liabilities of $200,000. Calculate the current ratio.

  2. A financially healthy company's current ratio should be at least

    A. 1 or less

    B. 1 or more

    C. less than 2

    D. more than 2

    E. less than 3

Answers and explanations

  1. 2.5

    Current ratio is calculated as current assets divided by current liabilities. In this case, the company has current assets of $500,000 and current liabilities of $200,000. Therefore, you divide $500,000 by $200,000 to give a current ratio of 2.5.

  2. The correct answer choice is B.

    There's no rule as to what a healthy company's current ratio should be. However, most analysts regard a current ratio of at least 1 to be the minimum.

If you need more practice on this and other topics from your accounting course, visit Dummies.com to purchase Accounting For Dummies! Featuring the latest information on accounting methods and standards, the information in Accounting For Dummies is valuable for anyone studying or working in the fields of accounting or finance.

About This Article

This article is from the book:

About the book authors:

Kenneth Boyd is the owner of St. Louis Test Preparation (www.stltest.net). He provides online tutoring in accounting and finance. Kenneth has worked as a CPA, Auditor, Tax Preparer, and College Professor. He is the author of CPA Exam For Dummies. Kate Mooney has been teaching accounting to both undergraduates and MBA students at St. Cloud State University since 1986, after earning her PhD from Texas A & M University. She is a licensed CPA in Minnesota and is a member of the State Board of Accountancy.

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