19. Based on the current ratio in #10 above, which one of the following is a correct statement
about this company?
a. This company has sufficient cash flow.
b. This company has enough current assets to meet its current liabilities.
c. This company has too much inventory.
d. This company fails to meet the liquidity threshold.
e. This company barely passes the liquidity test.
Solution
Current ratio = Current assets/Current liabilities
= (Cash & Cash Equivalents + Accounts Receivable + Inventory)/ (Accounts Payable +
Notes Payable + Taxes Due)
= (50,000 + 500,000 + 638,345) / (980,132.13 + 1,960,264.26 + 326,710.71)
= 1,188,345 / 3,267,107.1 = 0.36
Current ratio under 1 indicates company’s inability to pay off its obligations. Current ratio below
1 shows that the company is not in good financial health.
Correct answer is (d) This Company fails to meet the liquidity threshold.