Complete the current ratio for the following:
Total current assets = 12,000;Currentliabilities= 10,000 A. 1.2 B. None of these C. 1.5 D. 1.7 E. 7
The Correct Answer and Explanation is:
To determine the current ratio, we use the following formula:
[
\text{Current Ratio} = \frac{\text{Total Current Assets}}{\text{Current Liabilities}}
]
Given the values provided:
- Total Current Assets = $12,000
- Current Liabilities = $10,000
We can substitute these values into the formula:
[
\text{Current Ratio} = \frac{12,000}{10,000} = 1.2
]
Therefore, the correct answer is A. 1.2.
Explanation
The current ratio is a key financial metric used to assess a company’s liquidity and short-term financial health. It provides insight into a company’s ability to cover its short-term liabilities with its short-term assets. A current ratio of greater than 1 indicates that the company has more current assets than current liabilities, suggesting that it should be able to meet its short-term obligations without financial distress.
In this scenario, the calculated current ratio of 1.2 indicates that for every dollar of current liabilities, the company has $1.20 in current assets. This is a positive sign, suggesting that the company is in a stable position to cover its debts and obligations. A current ratio of 1.2 is generally considered adequate, though it may not be overly conservative. Different industries have varying benchmarks for current ratios, with some industries favoring higher ratios due to their operational structures and risks.
Conversely, if a company’s current ratio falls below 1, it may indicate potential liquidity issues, as the company may not have enough assets to cover its liabilities. Thus, maintaining a healthy current ratio is crucial for financial management, operational stability, and investor confidence. Companies often monitor their current ratios regularly to ensure they remain within acceptable ranges that align with their industry standards and financial goals.