CFA Practice Question
In a common-size balance sheet statement, a firm's current assets are reported at 37% and long-term liabilities are 12%. The equity is shown to be 64%. The firm's current ratio equals ______.
A. 1.54
B. 1.12
C. 1.37
Explanation: In a common-size balance sheet statement, all quantities are expressed as a fraction of the total assets. Therefore, since equity equals 64%, total liabilities equal 36%, of which 12% equals long-term liabilities. Thus, current liabilities equal 24%, a current ratio equal to 37%/24% = 1.54.
User Contributed Comments 8
| User | Comment |
|---|---|
| kenngkukoc | I don't understand why total liabilities = 36%? |
| morpheus918 | Totla liabilities and equity must equal 100% Assets = Liabilities + Equity. |
| JZino | Total Equity + Long Term Liabilities + Short term liabilities must equal 100%. Here Equity = 64%, LT liabilities = 12% therefore, ST liabilities = 24%. |
| boddunah | expect a question like this on the exam. |
| uahmed | Boddunah - you seem very convinced about this and other questions being on the exam |
| farhan92 | this took me a minute to figure out but I had to break down the equation to Current Assets + Long Term Assets = Current Liabilities +Long Term Liabilities +Equity. This leaves you with 2 unknown variables and then use the logic based on the comment by morpheus |
| ashish100 | Common sized balance sheet uses *Assets* as the denominator. So all of those percentages up there are relative percentages of total assets. CA = 37% of Assets Long Term Liability = 12% of Assets. Debt = 36% of Assets (100-64) Current liabilities = 36% - 12% = 24% Current Ratio = 37/24 = 1.54 |
| gyee2012 | This is a creative way of completing the calculations (Given: CA 37%) Assets = L (Given: LT L 12%)+ E (Given: 64%) 1- E (64%) = Total L 36% 36%-12% = 24% CL CA/ CL = Current Ratio 37%/ 24% = 1.54 |