CSLB Law & Business ExamBusiness FinancesMedium
A contractor's balance sheet shows current assets of $90,000 and current liabilities of $45,000. What is the contractor's current ratio?
- A2.0 to 1
- B3.0 to 1
- C0.5 to 1
- D1.5 to 1
Show answer & explanationAnswer & explanation
Correct answer: A. 2.0 to 1
Current ratio = Current Assets ÷ Current Liabilities = $90,000 ÷ $45,000 = 2.0. This means the contractor has $2.00 in current assets for every $1.00 of current liabilities, indicating short-term financial health.
Why the other options are wrong
- B. Overstates the ratio; not supported by the numbers.
- C. Would mean liabilities exceed assets, which is not the case here.
- D. Incorrect division result; does not match the figures given.
Current Ratio
A liquidity ratio calculated by dividing current assets by current liabilities, showing a company's ability to pay short-term obligations.
- Formula: Current Assets ÷ Current Liabilities
- A ratio above 1.0 generally indicates good short-term liquidity
- Used by lenders and bonding companies to assess financial stability
Memory trick: Current ratio = 'Can I pay my bills right now?'