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The current ratio (current assets + current liabilities) for this business is (A) too high - HSC - SSCE Business Studies - Question 12 - 2016 - Paper 1
Question 12
The current ratio (current assets + current liabilities) for this business is (A) too high. (B) acceptable. (C) dangerously low. (D) unable to be calculated.
Worked Solution & Example Answer:The current ratio (current assets + current liabilities) for this business is (A) too high - HSC - SSCE Business Studies - Question 12 - 2016 - Paper 1
Step 1
Assess the Current Ratio
Answer
To determine the current ratio, we need to analyze the relationship between current assets and current liabilities. The current ratio is calculated using the formula:
If the current ratio is greater than 1, it indicates that the business has more assets than liabilities, which is generally considered a good sign. If it is equal to 1, it indicates a break-even scenario, and if it is below 1, it may suggest financial trouble.
Step 2
Conclusion Based on the Current Ratio
Answer
After evaluating the ratio, if it stands within industry benchmarks or is positively measured against liabilities, it can be categorized as:
- (A) too high: if significantly above average and may indicate underutilized assets.
- (B) acceptable: indicating a healthy balance.
- (C) dangerously low: when it falls significantly below the norm, indicating possible insolvency risk.
- (D) unable to be calculated: if data is insufficient or unavailable.
Given the marking scheme indicates option (B) acceptable, we can conclude that the current ratio for this business is considered acceptable.