The following information was drawn from the balance sheets of the Augusta and Reno Companies: Required a.
Question:
The following information was drawn from the balance sheets of the Augusta and Reno Companies:
Required
a. Compute the current ratio for each company.
b. Which company has the greater likelihood of being able to pay its bills?
c. Assume that both companies have the same amount of total assets. Speculate as to which company would produce the higher return-on-assets ratio.
Augusta Company Reno Company Current assets $45,000 $72,000 Current liabilities 28,000 54,000
Step by Step Answer:
Introductory Financial Accounting for Business
ISBN: 978-1260299441
1st edition
Authors: Thomas Edmonds, Christopher Edmonds
Related Video
The current ratio is a financial ratio that measures a company\'s ability to pay its short-term obligations with its short-term assets. It is calculated by dividing a company\'s current assets by its current liabilities. The formula for calculating the current ratio is: Current Ratio = Current Assets / Current Liabilities Current assets are assets that can be converted to cash within one year, while current liabilities are debts that are due within one year. A current ratio of 1:1 or greater is generally considered good, as it indicates that a company has enough current assets to cover its current liabilities. A current ratio of less than 1:1 may suggest that a company may have difficulty meeting its short-term obligations. It\'s important to note that the current ratio is just one of many financial ratios that can be used to assess a company\'s financial health. It should be used in conjunction with other financial ratios and qualitative factors to make informed decisions about investing or lending to a company.
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