A company has $10,000 in cash, $20,000 in equipment, and $20,000 in accounts payable. The tax rate is 13%. What is the current ratio?

A company has $10,000 in cash, $20,000 in equipment, and $20,000 in accounts payable. The tax rate is 13%. What is the current ratio?

• A. 0.5
• B. 0.67
• C. 1.3
• D. 1.5

Answer: (A)

To determine the current ratio, it is essential to identify the current assets and current liabilities of the company. Current assets typically include cash, accounts receivable, and inventory, while current liabilities include accounts payable and other obligations due within one year. In this scenario, the company has $10,000 in cash as its only current asset. The accounts payable, amounting to $20,000, is categorized as a current liability. To calculate the current ratio, you divide the total current assets by total current liabilities: Current Ratio = Current Assets / Current Liabilities = $10,000 / $20,000 = 0.5. Thus, the current ratio is 0.5, which indicates that for every dollar of current liability, the company has 50 cents in current assets. This suggests that the company may face liquidity challenges, as its current assets are insufficient to cover its current liabilities.

To determine the current ratio, it is essential to identify the current assets and current liabilities of the company. Current assets typically include cash, accounts receivable, and inventory, while current liabilities include accounts payable and other obligations due within one year.

In this scenario, the company has $10,000 in cash as its only current asset. The accounts payable, amounting to $20,000, is categorized as a current liability. To calculate the current ratio, you divide the total current assets by total current liabilities:

Current Ratio = Current Assets / Current Liabilities = $10,000 / $20,000 = 0.5.

Thus, the current ratio is 0.5, which indicates that for every dollar of current liability, the company has 50 cents in current assets. This suggests that the company may face liquidity challenges, as its current assets are insufficient to cover its current liabilities.