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**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.

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**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 |