To calculate the current ratio, we need to understand that it is a measure of a company's ability to pay its short-term obligations with its short-term assets. The formula for the current ratio is:
Current Ratio = Current Assets / Current Liabilities
Let's identify the current assets from the given balances:
- Debtors: 50,000
- Bank: 10,000
- Stock (31-08-2007): 10,000
Adding these up:
Total Current Assets = 50,000 + 10,000 + 10,000 = 70,000
Next, we identify the current liabilities:
Therefore, Total Current Liabilities are: 35,000
Now, let's calculate the current ratio:
Current Ratio = Total Current Assets / Total Current Liabilities
Current Ratio = 70,000 / 35,000 = 2:1
Therefore, the current ratio is 2:1, which means that for every unit of currency in current liabilities, Adama Ltd has 2 units in current assets to pay those liabilities. This is a healthy liquidity position as a current ratio greater than 1 indicates that the company has more current assets than current liabilities.