Principles of Financial Accounting · free preview
Current Ratio and Working Capital as Measures of Liquidity
The current ratio and working capital convert adjusted trial balance figures into quick answers about whether a company can pay its short-term obligations from its short-term assets.
1. What liquidity means
What liquidity means
2. Working capital
Working capital
3. The current ratio
The current ratio
4. Reading the two together
Reading the two together
5. Working capital computation
A company reports current assets of 118,000 dollars and current liabilities of 52,000 dollars. What is working capital?
6. Current ratio computation
Using the same figures, current assets of 118,000 dollars and current liabilities of 52,000 dollars, compute the current ratio.
7. Interpreting a falling ratio
A company's current ratio fell from 2.4 to 1.6 over three years while remaining above 1. What is the most reasonable reading?
8. Why ratios differ across industries
Why might a grocery chain safely operate with a current ratio near 1.5 while a heavy machinery maker targets 2.5 or more?
9. Compute working capital
A bakery shows current assets of 42,000 dollars and current liabilities of 17,000 dollars. Compute working capital in dollars, number only.
10. Compute the current ratio
A bakery shows current assets of 42,000 dollars and current liabilities of 17,000 dollars. Compute the current ratio rounded to two decimal places.
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