Loading....

WAEC SSCE - Financial Accounting - 1991 (Objective)

Question 1 Report

Use the following information to answer the given question
\(\begin{array}{c|c} & DR & CR \\ & N & N \\ \hline \text{Goodwill} & 10,000 & \\ \text{Plant and Machinery} & 32,000& \\ \text{Freehold premises} & 50,000& \\ stock & 15,000& \\ debtors & 12,500 & \\ \text{Cash in bank} & 7,500 & \\ \text{cash in hand} & 2,000 & \\ \text{Profit and loss account} & & 34,000 \\ \text{Accrued rent} & & 500 \\ \text{Sundry creditors} & & 9500 \\ Capital & \overline{129,000} & \overline{129,000}\end{array}\)
Current ratio
Answer Details
To calculate the current ratio, we need to divide the total current assets by the total current liabilities. Current assets are those that can be easily converted into cash within one year, and current liabilities are those that are due to be paid within one year. From the information given, we can see that the current assets are: Stock + Debtors + Cash in bank + Cash in hand = 15,000 + 12,500 + 7,500 + 2,000 = 37,000 The current liabilities are: Accrued rent + Sundry creditors = 500 + 9,500 = 10,000 Therefore, the current ratio is: Current ratio = Current assets ÷ Current liabilities Current ratio = 37,000 ÷ 10,000 Current ratio = 3.7 : 1 So, the current ratio is 3.7 : 1. This means that for every $1 of current liabilities, the business has $3.7 of current assets available to pay off those liabilities. A high current ratio indicates that a business is able to meet its short-term obligations, while a low current ratio may suggest that the business could have difficulty meeting its short-term obligations.
Read lesson note on Nature And Significance Of Accounting (JAMB)
View Answer