Classifying Assets and Liabilities — Practice Problems
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.
A company has current assets of $500,000 and current liabilities of $200,000. Calculate the current ratio.
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
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.
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.
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