The procurement manager has supplier data: Current Assets = $300 (Stock $200, Debtors $60, Cash $40). Short-Term Liabilities = $150 (Bank overdraft). Which calculation gives the current ratio?
The current ratio = Current Assets ÷ Current Liabilities. Here, Current Assets = 300; Current Liabilities = 150. Therefore, Current Ratio = 300 ÷ 150 = 2.0. This means the supplier has twice the assets available to cover short-term debts, indicating strong liquidity. The other options incorrectly subtract assets or liabilities, which is not the formula. Responsible sourcing emphasises interpreting ratios accurately: a ratio below 1 signals liquidity risks, while excessively high ratios may indicate inefficient asset utilisation.
[Reference: CIPS L4M4 Study Guide (v2), LO: “Application” – current ratio calculation and interpretation., , , , ]
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