The following selected data come from Celebration Company's balance sheets over three recent years. Based on the data, what is Celebration's current ratio for each of the three years, and do the ratios show deterioration or improvement in Celebration's liquidity?
A) 2.12; 2.17; 2.22; strong but deteriorating slightly
B) 0.39; 0.40; 0.41; weak but improving slightly
C) 2.56; 2.53; 2.46; strong and improving slightly
D) 0.47; 0.45; 0.43; weak and deteriorating slightly

Question

The following selected data come from Celebration Company's balance sheets over three recent years. Based on the data, what is Celebration's current ratio for each of the three years, and do the ratios show deterioration or improvement in Celebration's liquidity? 
A) 2.12; 2.17; 2.22; strong but deteriorating slightly 
B) 0.39; 0.40; 0.41; weak but improving slightly 
C) 2.56; 2.53; 2.46; strong and improving slightly 
D) 0.47; 0.45; 0.43; weak and deteriorating slightly

Quizplus · Accepted Answer

The current ratio is calculated as current assets divided by current liabilities. Based on the data provided, Celebration Company's current ratios for the three years are as follows: 
Year 1: current assets of $28,125 / current liabilities of $10,969 = 2.56 
Year 2: current assets of $30,870 / current liabilities of $12,179 = 2.53 
Year 3: current assets of $30,506 / current liabilities of $12,404 = 2.46 
All three ratios are above 1, indicating that Celebration Company has more current assets than current liabilities, and is therefore considered to have good liquidity. Additionally, the ratios show a slight decline over the three-year period, indicating a deterioration in liquidity; however, the decline is not significant. Therefore, the best choice is C: 2.56; 2.53; 2.46; strong and improving slightly.

The Following Selected Data Come from Celebration Company's Balance Sheets