I want to ask a question about current assets and liabilties in relation to the current ratio.
I was provided with the following question:
Weavers Wedding Dresses has current liabilities on 31 December of £140,000 and its current ratio at that time is 2:2. What are the company's current assets?
I thought, that since 2:2 evidently should simplify to 1:1 then the current assets are equal to current liabilities, so current assets are also 140,000.
However, the answer states the following:
You know that current assets divided by current liabilties equals the current ratio. You are trying to find out the value for current assets (the unknown variable x) so your equation is x divided by £140,000 equals 2:2.
x / 140,000 = 2:2 Isolating x on one side of the equation gives you £140,000 times 2:2
x = 140,000 * 2:2
so your current assets are £308,000 (140,000 x 2:2)
You can prove this by plugging that figure into the first equation: £308,000 divided by 140,00 does equal 2:2. Hooray!
Now, I'm not sure if my upper-school mathematics qualifications have failed me, but I'm sure that I am not mistaken in my analysis as given in the straightforward fashion above?
Have I made an error in my calculations, if any?
A link to this book (Financial Accouting for Dummies, UK edition) is given here, which leads to the exact page in question.