Reading a Balance Sheet: Working Capital, Current Ratio, and Quick Ratio
"Reading a Balance Sheet: Working Capital, Current Ratio, and Quick Ratio" is lesson 7 of 8 in the Law & Business Learning Hub. It opens with "Two Statements, Two Jobs" and works through 5 short steps, then a worked example you can check yourself against.
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Steps in this lesson
Two Statements, Two Jobs
Current Assets and Current Liabilities
The Current Ratio
The Quick Ratio
Use the Ratios With the Income Statement and Retention
The worked example in the course applies this lesson to a realistic job in 6 steps, from "Check that the sheet balances" through "Read the trend".
What you'll be able to do
Explain the main idea of "Reading a Balance Sheet: Working Capital, Current Ratio, and Quick Ratio" in plain language you can use on the exam.
Apply this step with confidence: "The Current Ratio".
Apply this step with confidence: "The Quick Ratio".
Apply this step with confidence: "Use the Ratios With the Income Statement and Retention".
Test yourself on the worked example and the quick-check quiz inside the classroom.
The diagram for this lesson, exactly as it appears in the Learning Hub.
The first steps of this lesson
Step 1: Two Statements, Two Jobs
The Reference Book (Section III, Financial Responsibility and Control) says the balance sheet and income statement summarize a firm's internal data and feed ratio analysis that exposes strengths and weaknesses. The balance sheet is a snapshot of financial condition at one point in time: assets on the left, liabilities and owners' equity on the right, and the two sides are always equal. The income statement covers a period (a year, quarter, or month) and shows revenue, expenses, and profit or loss, with net profit as the "bottom line." Banks lending a line of credit want both, ideally prepared by a CPA, for the current period and several prior years.
Step 2: Current Assets and Current Liabilities
Current assets are cash or can normally be turned into cash within about a year: cash, retention, accounts receivable, inventories (which for a contractor include materials, labor, and overhead on jobs in progress), and prepaid expenses. Retention is a specified amount, usually 10 percent, withheld from progress payments until completion and acceptance; you have earned it but not yet been paid. Current liabilities are debts due within one year: accounts payable, notes payable, accrued expenses, accrued payroll, and taxes payable. The difference between total current assets and total current liabilities is working capital (Reference Book, Section III, Current Ratio).
The remaining 3 steps, the worked example and the quiz are in the course. This is a preview. The full lesson, with the step-by-step explanations, a worked example and a quick-check quiz, is inside the classroom.
Independent exam preparation. Contractors Classroom is not affiliated with the Contractors State License Board, and no course can guarantee a passing result.
