Open Question
The following table contains selected financial information for Tougher Question, Inc.
Calculate the current ratio and working capital for TQ, Inc.
14. Financial Statement Analysis
Ratios: Working Capital and the Current Ratio
Struggling with Financial Accounting?
Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Which of the following ratios are equivalent to a current ratio of 2:1?
A
5:3
B
3:2
C
6:3
D
4:2
Verified step by step guidance1
Understand the concept of the current ratio: The current ratio is a financial metric that measures a company's ability to pay its short-term obligations with its short-term assets. It is calculated as Current Assets ÷ Current Liabilities.
Interpret the given ratio of 2:1: A current ratio of 2:1 means that for every 1 unit of current liabilities, there are 2 units of current assets.
Compare the given ratios to the equivalent of 2:1: To determine equivalence, simplify each ratio to its lowest terms and check if it matches the proportion of 2:1.
Simplify each ratio: For example, simplify 6:3 by dividing both terms by their greatest common divisor (GCD), which is 3. This results in 2:1. Similarly, simplify 4:2 by dividing both terms by their GCD, which is 2, resulting in 2:1.
Conclude which ratios are equivalent: After simplification, identify that 6:3 and 4:2 are equivalent to the current ratio of 2:1, while 5:3 and 3:2 are not equivalent.
7:11mWatch next
Master Ratios: Working Capital and the Current Ratio with a bite sized video explanation from Brian
Start learningRelated Videos
Related Practice
Ratios: Working Capital and the Current Ratio practice set
Problem sets built by lead tutorsExpert video explanations