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AGA Exam CGFM Topic 3 Question 69 Discussion
Topic #: 3
The Parking Fund for a government entity has the following information in its Statement of Net Position. Calculate the current ratio.
Total current assets $1,320
Total non-current assets $8,100
Total assets $9,420
Total current liabilities $ 810
Total non-current liabilities $ 360
Total liabilities $1,170
Total net position $8,250
What Is the Current Ratio?
The current ratio measures an entity's ability to cover its short-term liabilities with its short-term assets. The formula is: CurrentRatio=TotalCurrentAssetsTotalCurrentLiabilitiestext{Current Ratio} = frac{text{Total Current Assets}}{text{Total Current Liabilities}}CurrentRatio=TotalCurrentLiabilitiesTotalCurrentAssets
Calculation:
Total Current Assets = $1,320
Total Current Liabilities = $810
CurrentRatio=1,320810text{Current Ratio} = frac{1,320}{810}CurrentRatio=8101,320 CurrentRatio1.63text{Current Ratio} 1.63CurrentRatio1.63
Why the Current Ratio Matters:
A current ratio above 1 indicates that the entity has more current assets than current liabilities, suggesting good short-term liquidity.
Why Other Options Are Incorrect:
A . 0.61, B. 0.98, C. 1.14: These values result from incorrect calculations or misinterpretations of the formula.
Reference and Documents:
GAO Financial Analysis Guide: Provides guidance on using the current ratio to assess liquidity.
GASB Financial Reporting Requirements: Highlights the importance of liquidity measures in government financial statements.
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