Horizontal Common Size B.S.

CFA Level I FRA
#1

Hey everyone, hope all is well…

I came across a question regarding horizontal common-size balance sheets. It stated current assets and current liabilites for years 2005-2007.

CA 2005: 113.6 CL 2005: 130.7

CA 2006: 106.1 CL 2006: 128.9

CA 2007: 101.4 CL 2007: 131.0

In the base year, X Corporation’s current ratio was 1.5. X Corporation’s current ratio as of Dec 31, 2007, is closet to:

a. 0.77

b. 1.16

c. 1.29

Could someone please explain why the answer is B, 1.16. I’m not sure I understand the calculation? Thank you!

#2

I’m not clear, either. When you calculate the current ratio with given info in year 2007, it’s 0.77. If you multiply this by 1.5, you get the answer you refer to, 1.16. I found that by accident. I’m not sure why you would multiply by 1.5.

#3

If the base year current ratio is 1.5, then assume that current assets were, say, 15 and current liabilities were 10. Then in 2007, current assets would be 15 × 101.4% = 15.21, and current liabilities would be 10 × 131% = 13.10; the current ratio would be 15.21 / 13.10 = 1.16.

#4

Oh. I see. I’m an idiot.

#5

That makes perfect sense. Thanks!

#6

My pleasure.