In 2011,P Co reported a current ratio of 1.47 and in 2012,0.55.In examining their statement of financial position for 2012,they disclosed current assets of $4,362 million and current liabilities of $7,914 million.In 2011,they had no short-term borrowings but they disclosed $3,921 million in short-term borrowings for 2012.What would P Co's current ratio have been in 2012 if they had not borrowed those funds?
A)0.37
B)0.98
C)1.09
D)It cannot be computed without knowing the amount of current liabilities in 2011 so we can compute the average current liabilities in the denominator.

Question

Quizplus · Accepted Answer

The current ratio formula is as follows:

Current Ratio = Current Assets / Current Liabilities

Thus, we can calculate the current ratio for 2012 before borrowing the funds as:

Current Ratio = 4,362 / 7,914 = 0.55

Therefore, the current ratio in 2012 without borrowing funds would be 0.55.

However, this ratio cannot be compared directly with the 2011 ratio of 1.47 since we do not know the amount of current liabilities in 2011. Therefore, we cannot calculate the average current liabilities and use it in the denominator to compute a comparable ratio.

To answer the question, we must subtract the amount of short-term borrowings from the current liabilities for 2012 to see what the ratio would have been without the borrowing:

Current Ratio = 4,362 / (7,914 - 3,921) = 4,362 / 2,993 = 1.46 (approx.)

Therefore, the current ratio in 2012 without borrowing the funds would be approximately 1.46. The closest answer choice is C with a current ratio of 1.09, which is much lower than the actual ratio of 0.55 with borrowing.

In 2011,P Co Reported a Current Ratio of 1