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American Institute Of Constructors (AIC) Level 1 Practice Test

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A company has $10,000 in cash, $20,000 in equipment, and $20,000 in accounts payable. The tax rate is 13%. What is the current ratio if current assets are considered as cash and current liabilities are accounts payable?
Correct Answer:
0.5
Explanation:
Current ratio compares assets that can quickly become cash with obligations due soon. Here, current assets are just cash of $10,000, and current liabilities are accounts payable of $20,000. So the current ratio is 10,000 / 20,000 = 0.5. The tax rate doesn’t affect this measure, and the equipment value is a long-term asset, not included in current assets. A ratio below 1 suggests the company may have liquidity challenges in the near term, since current liabilities exceed readily available current assets.

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