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Magazine Chapter 10: Problem 10
Apolo Company reported year-end current assets of \(\$ 75,000\) and current liabilities of \(\$ 25,000\). The company's current ratio is: a. \(1 / 3\) c. 4 b. 3 d. \(\$ 50,000\)
Short Answer
Expert verified
b. 3
Step by step solution
01
Understanding the Current Ratio
The current ratio is a financial metric used to evaluate a company's ability to pay off its short-term liabilities with its short-term assets. It is calculated by dividing current assets by current liabilities.
02
Identify Given Values
From the exercise, we are given that the current assets are \( \\( 75,000 \) and the current liabilities are \( \\) 25,000 \).
03
Applying the Formula
Using the current ratio formula, \( \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} \), we substitute the given values into the formula.
04
Calculate the Current Ratio
Substitute the given values into the formula: \( \frac{75,000}{25,000} \).
05
Perform the Division
Divide \( 75,000 \) by \( 25,000 \) to find the current ratio: \( \frac{75,000}{25,000} = 3 \).
06
Conclusion
Hence, the current ratio is 3, which matches option b.
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Key Concepts
These are the key concepts you need to understand to accurately answer the question.
Financial Metrics
Financial metrics are like a health check-up for a business. They help both internal and external stakeholders understand the financial health of a company. In simple terms, financial metrics help to measure how well a company is doing financially.
These metrics come in various forms and serve different purposes:
Financial metrics are crucial for making informed decisions, whether for managing a company's strategy or investing in new opportunities.
These metrics come in various forms and serve different purposes:
- Profitability Metrics: These show how much profit a company is making. Examples include net profit margin and return on equity.
- Liquidity Metrics: These indicate a company's ability to pay off its current debts. The current ratio, a common liquidity metric, provides insight into the short-term financial stability of a company.
- Efficiency Metrics: These measure how well a company uses its assets. Inventory turnover and asset turnover are typical examples.
Financial metrics are crucial for making informed decisions, whether for managing a company's strategy or investing in new opportunities.
Short-term Liabilities
Short-term liabilities are obligations a company needs to settle within a year. They represent money that needs to be paid out soon and include debts like supplier invoices or short-term loans.
Examples of short-term liabilities include:
Understanding short-term liabilities is important. It helps businesses plan their finances and ensure they have enough resources to meet their obligations.
Examples of short-term liabilities include:
- Accounts Payable: Money owed to suppliers for goods and services purchased.
- Short-term Debt: Loans and financial obligations due within one year.
- Accrued Liabilities: Expenses that a company has incurred but not yet paid.
Understanding short-term liabilities is important. It helps businesses plan their finances and ensure they have enough resources to meet their obligations.
Current Assets
Current assets are valuable items a company expects to use, sell, or convert into cash within one year. They are vital for covering short-term liabilities and ensuring smooth business operations.
Common examples include:
Maintaining adequate current assets is essential. It allows a business to pay its bills and invest in opportunities for growth.
Common examples include:
- Cash and Cash Equivalents: Money readily available for business expenses.
- Accounts Receivable: Money owed to the company by customers for goods or services provided.
- Inventory: Goods available for sale to customers.
Maintaining adequate current assets is essential. It allows a business to pay its bills and invest in opportunities for growth.
Accounting Calculations
Accounting calculations are the systematic processes used to analyze a company's financial data. They guide businesses in financial decision-making by providing clear insights.
Key types of accounting calculations include:
Using these calculations helps administrators and SMEs analyze overall financial performance. By leveraging these insights, companies can optimize their operations and find areas for improvement.
Key types of accounting calculations include:
- Ratio Analysis: Ratios, like the current ratio, reveal relationships between different financial statement items.
- Trend Analysis: Examines financial statements over different periods to identify patterns.
- Variance Analysis: Compares budgeted figures to actual results to determine discrepancies.
Using these calculations helps administrators and SMEs analyze overall financial performance. By leveraging these insights, companies can optimize their operations and find areas for improvement.
