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.

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image1769×1094 188 KB

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