Please refer to the following data: $$\begin{array} { | l | r | r | }
\hline & { \text { Debit } } & { \text { Credit } } \
\hline \text { Cash } & \$ 16,000 & \
\hline \text { Accounts receivable } & 2,800 & \
\hline \text { Prepaid insurance } & 800 & \
\hline \text { Land } & 40,000 & \
\hline \text { Building } & 50,000 & \
\hline \text { Accumulated depreciation } & & \$ 32,000 \
\hline \text { Accounts payable } & & 2,200 \
\hline \text { Wages payable } & & 4,000 \
\hline \text { Notes payable-short term } & & 2,300 \
\hline
\end{array}$$ Using the "rule of thumb" guidelines,what conclusion could you draw?
A) This business faces a liquidity problem, and may have trouble paying off its current liabilities with its current assets.
B) This business has does not have enough total assets to meet its total obligations.
C) This business has a very good current ratio, but the debt ratio indicates long-term liquidity problems.
D) This business should have no difficulties paying off its liabilities.

Question

Please refer to the following data: $$\begin{array} { | l | r | r | } 
\hline & { \text { Debit } } &  { \text { Credit } } \
\hline \text { Cash } & \$ 16,000 & \
\hline \text { Accounts receivable } & 2,800 & \
\hline \text { Prepaid insurance } & 800 & \
\hline \text { Land } & 40,000 & \
\hline \text { Building } & 50,000 & \
\hline \text { Accumulated depreciation } & & \$ 32,000 \
\hline \text { Accounts payable } & & 2,200 \
\hline \text { Wages payable } & & 4,000 \
\hline \text { Notes payable-short term } & & 2,300 \
\hline
\end{array}$$ Using the "rule of thumb" guidelines,what conclusion could you draw?
A) This business faces a liquidity problem, and may have trouble paying off its current liabilities with its current assets.
B) This business has does not have enough total assets to meet its total obligations.
C) This business has a very good current ratio, but the debt ratio indicates long-term liquidity problems.
D) This business should have no difficulties paying off its liabilities.

Quizplus · Accepted Answer

The given data does not provide any information related to liquidity or total assets and obligations. Therefore, we cannot conclude A or B. The "rule of thumb" for the current ratio is 2:1, which means that a current ratio of 2 or higher indicates good liquidity. As we do not have the current assets and current liabilities data, we cannot calculate the current ratio. Hence, we cannot conclude C. The only conclusion that can be drawn is that the business should have no difficulties paying off its liabilities as per option D.

Please Refer to the Following Data Using the "Rule of Thumb" Guidelines,what Conclusion Could You Draw