Question

question 23

a clothing retailer has current assets of $100,000 and current liabilities of $50,000.

what does its current ratio indicate?

• 3.0 indicates that the retailer is retaining excess liquid assets.
• 2.0 indicates that the company has $2 in assets for every $1 in liabilities, which is considered a strong position.
• 1.0 indicates that assets and liabilities are in perfect balance.
• 0.5 indicates that the retailer lacks enough assets to cover its liabilities.

Explanation:

Calculate the current ratio

Using the Current Ratio and Liquidity Analysis knowledge points

$$ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} = \frac{\$100,000}{\$50,000} = 2.0 $$

Interpret the calculated ratio

Using the Liquidity Analysis knowledge point

$$ \text{Ratio of } 2.0 \implies \$2 \text{ of current assets for every } \$1 \text{ of current liabilities} $$

Answer:

• (A) 3.0 indicates that the retailer is retaining excess liquid assets.
• (B) 2.0 indicates that the company has $2 in assets for every $1 in liabilities, which is considered a strong position. (Correct answer)
• (C) 1.0 indicates that assets and liabilities are in perfect balance.
• (D) 0.5 indicates that the retailer lacks enough assets to cover its liabilities.