CFA Practice Question

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
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