Question

The following financial information is taken from the balance sheets of the Peter Company and the Paul Company:

Peter Paul
Current assets $200,000 $50,000
Current liabilities 40,000 20,000

Calculate the current ratio for each company.
Round answers to two decimal places, when appropriate.

Peter Company Answer= ????
Paul Company Answer= ????

Which firm has a higher level of liquidity? =????

Answer 1

Answer:

Current ratios:

Peter Company Answer = 5

Paul Company Answer = 2.5

Peter company has the higher liquidity than the Paul company. Its current ratio is double than the Paul's.

Explanation:

Company :                 Peter           Paul

Current assets      $200,000    $50,000

Current liabilities   $40,000      $20,000

To calculate Liquidity we will us following ratio formula:

Current Ratio = Current Assets / Current Liabilities

Peter Company

Current Ratio = $200,000 / $40,000 = 5

Paul Company

Current Ratio = $50,000 / $20,000 = 2.5

Peter company has the higher liquidity than the Paul company