Help with a question (1 Viewer)

[Niksta123]

Could someone please help me out with this question??

Use the following information for Eyesfront Ltd to answer question 8.

Current Assets = $60 000
Current liabilities = $40 000
Working Capital Ratio (industry average) = 5:2

(8) Which of the following statements best describes Eyesfront's liquidity?

(a) a working capital ratio of 4:6 which is low in comparison to the industry average
(b) a working capital ratio of 5:2 which is identical to the industry average
(c) a working capital ratio of 6:4 which is above the industry average
(d) a working capital ratio of 6:4 which is below the industry average




{Apparently the answer is D}

- Can someone please tell me how they do the question? - It's probably really simple...I must have missed something??

Thanks

 

[nickwilson]

Could someone please help me out with this question??

Use the following information for Eyesfront Ltd to answer question 8.

Current Assets = $60 000
Current liabilities = $40 000
Working Capital Ratio (industry average) = 5:2

(8) Which of the following statements best describes Eyesfront's liquidity?

(a) a working capital ratio of 4:6 which is low in comparison to the industry average
(b) a working capital ratio of 5:2 which is identical to the industry average
(c) a working capital ratio of 6:4 which is above the industry average
(d) a working capital ratio of 6:4 which is below the industry average




{Apparently the answer is D}

- Can someone please tell me how they do the question? - It's probably really simple...I must have missed something??

Thanks

Working Capital Ratio = Current Assets / Current Liabilities
= 60000 / 40000
= 6:4
5:2 = 2.5 6:4 = 1.5
Eyesfront Ltd
therefore it is below the industry average ( This means that Eyesfront have less current assets and more current liabilities compared to the industry average.)

 

[Niksta123]

Thanks for your help...

Turns out the question was very simple - i got confused as they said the industry average was 5:2 - and I couldn't work out how Eyesfront was 1.5:1 and the industry average was 5:2 ...but it makes sense how you have done it.

Thanks again.

 

[AlyssaMe]

sorry im a bit confused now,

i thought you had to do 60000/40000 which when i typed on my calculator, gave me an answer of 1:5?

someone help please

 

[veloc1ty]

sorry im a bit confused now,

i thought you had to do 60000/40000 which when i typed on my calculator, gave me an answer of 1:5?

someone help please

You got 1.5 on the calculator, which is a fraction, not a ratio.

60000:40000 just simplifies down to 6:4, no calculations needed, just strike off the zeros.