Incorrect Current Ratio in PcM workshop?

Practice Management
1

Hi,

I noticed in your most recent workshop for PcM “Evaluating a Firm’s Financial Metrics,” Thomas had a question answer incorrect at 01:50:50. It seems the question was on the Current ratio which is Current Assets / Current Liabilities, but he’s answered the question as Total Assets / Total Liabilities. I believe this is incorrect no? @coachthomasmasino

Thanks, James

1 Like
2

Hi James,

From page 418 of the Architect’s Handbook of Professional Practice, the formula for a firm’s current ratio, or its solvency, is equal to total current assets divided by total current liabilities, which matches what was presented as the answer for Question #1 in Part 3 of the workshop.

Thanks,
Thomas

3

Thomas, this is not what your presentation had. As I said you wrote Total Assets / Total Liabilities. See screenshot attached.

[ screenshot removed ]

4

This is curious. In the balance sheet associated with this exercise, there are two separate line items. One for TOTAL CURRENT ASSETS and one for TOTAL ASSETS. One for TOTAL CURRENT LIABILITIES and one for TOTAL LIABILITIES.
From Document B:
Total Current Assets = $127,500
Total Assets = $300,000
Total Current Liabilities = $62,500
Total Liabilities = $67,500

So, in this case, if the AHPP is correct, then the current ratio would be:
Current Ratio:
= Total Current Assets / Total Current Liabilities
= $127,500 / $62,500
= 2.04

So which is it? Total Current or Total?

5

It should be 2.04, which is still a healthy current ratio… the fact it was >4 should have indicated something was off as that is unusually high

6

Then both the Black Spectacles Virtual Workshop and Video Lecture have it wrong. They both say that the Current Ratio = Total Assets / Total Liabilites. @coachthomasmasino

7

Hi @coachthomasmasino Can you please weigh in on this question that I asked 3 days ago?

8

@avatarlucas FYI - we do not allow our paid content to be shared (included Virtual Workshop content). Your screenshot has been removed.

9

@avatarlucas @Citrillion I’ve verified with our subject matter expert that the following is the correct formula (per AHPP):

Current Ratio = Total Current Assets / Total Current Liabilities

Using the figures provided in the Virtual Workshop, the Current Ratio would be $127,500 / $62,500 = 2.04.

Therefore, the Virtual Workshop presentation was incorrect and I apologize for that confusion. This question came up several months ago and it was changed in error. I have reverted it back to this correct formula. With that said, our team will also work on correcting the Lecture Video to reflect this.

It is confusing because the terms include both total and current in their names. A simple way to remember this: the current ratio is a metric used to assess how easily you can cover your monthly bills. In personal finance terms, you’d do this by considering cash, or cash equivalent assets, divided by your monthly bills. You wouldn’t include certain assets in the numerator because while they’re valuable, they’re not easily converted to cash (i.e. your car, or an expensive watch or something). You also wouldn’t include long-term debts in the denominator, because they’re not coming due soon. So, if you took out a loan that’s due in two years, you wouldn’t include that.

Sorry again for this confusion. We appreciate you pointing this out!

Kiara Galicinao, AIA, NCARB
Product Coordinator
Black Spectacles

1 Like
10

Thanks so much for clearing this up Kiara @kiaragalicinao! It’s hard to be confident about what you’re learning when you can’t rely on the accuracy of the study material.

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11

I totally hear you @Citrillion and understand your concerns. At Black Spectacles, we align our study materials with the ARE 5.0 Guidelines and relevant sources so that you have the most accurate information for exam purposes. If there ever is a discrepancy or area of confusion, we appreciate our members bringing them to our attention so that we can make appropriate adjustments. We never want you to doubt the content that you are studying (you have enough on your plate when preparing for these exams :slightly_smiling_face:) so please don’t hesitate to reach out if something doesn’t look right. We are also constantly reviewing and updating our materials as necessary to stay in line with the current ARE content/format.

Thank you for understanding!

Kiara