Damian, a recent college graduate with a degree in accounting, is helping a newly formed construction company set up its accounting system. Although the company had purchased accounting software, Damian wants to make certain that future reports will distinguish between current liabilities and long-term liabilities. In the future, he will need to know the amount of total current liabilities in order to
A) know when it is time to make a long-term mortgage payment.
B) calculate if the company has purchased too much inventory for home building.
C) analyze whether the company can afford to make capital purchases such as additional land acquisition.
D) analyze whether the company has enough funds to pay the near-term bills.

Question

Quizplus · Accepted Answer

In order to analyze whether the company has enough funds to pay bills that come due in less than a year, Damian will perform the current ratio. The accountant must separate current liabilities from long-term liabilities. Total current assets (cash + accounts receivables + inventory) are divided by total current liabilities. The resulting multiple (known as the current ratio) serves as a gauge that helps the accountant determine if the company has an adequate cash position to pay near-term bills.

Damian, a Recent College Graduate with a Degree in Accounting