A Balance Sheet Shows Cash, $75,000; Marketable Securities, $110,000; Receivables, $90,000; And $225,000 Of Inventories. Current Liabilities are $200,000. The Current Ratio Is 1.375 to 1.

Answer Of True Or False Question

Current Ratio is calculated as Current Assets divided by Current Liabilities for the period.

If the current assets are more than then the company can easily meet its short-term debts. If current ratio is equal to 1, then it means that the company all the current assets are used to offset current liabilities. If the current ratio is more than 1, then the company has more current assets to meet current liabilities. If the company has current ratio less than 1 then the company has not enough current assets to meet current liabilities.

It is “False” as proved from below calculation:

We know Current Ratio is equal to the following formula:

Current Ratio  =   Current Assets / Current Liabilities)

Here:

Current Assets = Cash + Marketable Securities + Accounts Receivable + Inventories

By putting the value, we have:

Current Assets = $75,000 + $11,000 + $90,000 + $225,000 = $500000

Current Liabilities  =  $200,000

Now, putting the value of Current Ratio, we get the following:

Current Ratio =  $500,000 / $200,000

Current Ratio =  2.5

Interpretation:

The results shows that the company has $2.5 in Current Assets to meet every $1 in current liabilities. So, the company can easily utilizes its assets to meet its current obligations.