Question

The following information was drawn from the 2017 balance sheets of the Cedar and Maple companies:

	Cedar			Maple
Current assets	$	48,000		$	77,000
Current liabilities		43,200			15,400

Required

a.	Compute the current ratio for each company. (Round your answers to 2 decimal places.)
	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

Answer 1

Solution:

Cedar and Maple Companies

1. Computation of Current ratio:

Current ratio = current assets/current liabilities

	Cedar	Maple
Current Assets	$48,000	$77,000
Current Liabilities	$43,200	$15,400
Current ratio	48,000/43,200 =1.11	77,000/15,400 =5

1. The current ratio is a liquidity measure that determines the company’s availability of current assets to meet the current liabilities.

On observing the ratios as they are, Maple with high current ratio of 5 seems to be in a better position to pay its bills.

Cedar’s current ratio of 1.11 indicates that the company’s current assets are 1.11 times more than current liabilities.

Maple’s current ratio of 5 indicates that the company’s current assets are 5 times more than its current liabilities.

Further probing, indicates that the

The ideal ratio would be 2:1 and accordingly Cedar company seems to be in a better position to meet its current liabilities.

Though Maple has higher current ratio of 5, a high ratio sometimes indicates to a higher portion of funds locked up in slow moving or obsolete inventories.

1. Based on the current ratios of both the companies, Maple Company would produce higher return on assets ratio.