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ACCA Applied Knowledge · Financial Accounting · Importance and purpose of analysis of financial statements

Gamma Co's current ratio is 2.0 with current assets of $600,000. At the year end, Gamma sold a non-current asset at its carrying amount of $100,000 for cash on 31 December, a window-dressing action it intends to reverse early in January by buying a similar asset. Gamma also had no other changes. What would the current ratio have been without this sale if the $100,000 cash is included in the current assets given?

The current ratio of 2.0 with current assets of $600,000 implies current liabilities of $300,000. Removing the $100,000 cash from the year-end sale leaves current assets of $500,000, so the ratio would have been 500,000 divided by 300,000, which is 1.67. Window dressing inflated the reported ratio.

  1. A1.83
  2. B1.67Correct
  3. C2.00
  4. D2.50

Explanation

Current assets of $600,000 and ratio 2.0 give current liabilities of $300,000. Without the sale, current assets would be $500,000 (removing the $100,000 cash), so ratio is 500/300 = 1.67. Option 1.83 results from deducting from the wrong figure, and 2.50 adds instead of subtracting.

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