Financial Ratios for the Florida B&F Exam

Accounting is the largest part of the Business and Finance exam: Content Area D, Conducting Accounting Functions, is 32% of the questions. Ratio questions are some of the most predictable in that area. Each one is a single formula applied to a few balance sheet numbers, and the wrong answers are almost always the result of using the wrong line items. This page gives the formulas, a full worked balance sheet, and the traps.

Ratios also show up outside Area D. Sureties and lenders use them to decide how much work a contractor can take on, which ties into "underwriting requirements for bonding" in Area A.

The four core measures

Working capital is a dollar amount. The other three are ratios (written like 1.5 or 1.5 to 1). Many exam distractors swap the two.

What counts as "current"

Current assets are cash or items expected to turn into cash within one year. Current liabilities are obligations due within one year.

Equipment, vehicles, buildings and land are not current assets. A five-year equipment loan is a long-term liability, except for the portion due in the next 12 months. See financial statements for how overbillings and underbillings get there.

Worked example: one balance sheet, four measures

ABC Contracting, Inc. has this year-end balance sheet (summarized):

Other items: equipment (net) $340,000; long-term debt (excluding current portion) $200,000; owner's equity $400,000.

Check the balance sheet first. Total assets = $460,000 + $340,000 = $800,000. Total liabilities = $300,000 + $200,000 = $500,000. Liabilities plus equity = $500,000 + $400,000 = $800,000. It balances.

1. Working capital

$460,000 − $300,000 = $160,000

2. Current ratio

$460,000 ÷ $300,000 = 1.53 (about 1.53 to 1)

3. Quick ratio

Quick assets are cash, marketable securities and receivables. Inventory and prepaid expenses are left out because they cannot be turned into cash quickly.

Cash + accounts receivable + retainage receivable = $85,000 + $240,000 + $60,000 = $385,000

$385,000 ÷ $300,000 = 1.28

A more conservative analyst might exclude retainage, because it is not collectible until the job closes out: ($85,000 + $240,000) ÷ $300,000 = 1.08. On the exam, use exactly the items the question gives you as quick assets. Most textbook problems list only cash, receivables and sometimes marketable securities.

4. Debt to equity

Total liabilities ÷ owner's equity = $500,000 ÷ $400,000 = 1.25

Note that debt to equity uses total liabilities, current and long-term. Using only current liabilities ($300,000 ÷ $400,000 = 0.75) is a common error.

Interpreting the results

• A current ratio above 1.0 means current assets exceed current liabilities. Many lenders and sureties look for something comfortably above 1.0, but there is no single required number, and the exam will tell you if it wants a specific benchmark.
• A rising current ratio with a falling quick ratio usually means the increase is coming from inventory or prepaid items, not cash or receivables.
• A high debt to equity ratio means creditors have financed more of the business than the owners have. That increases risk and can limit bonding.

How transactions move the ratios

Exam questions sometimes describe a transaction and ask what happens to a ratio.

Example. A contractor has current assets of $400,000 and a current ratio of 2.0. It pays $50,000 of accounts payable in cash. What is the new current ratio?

• Current liabilities before: $400,000 ÷ 2.0 = $200,000
• After payment: current assets $350,000; current liabilities $150,000
• New ratio: $350,000 ÷ $150,000 = 2.33

Working capital did not change ($200,000 before and after), but the ratio rose. Paying a current liability with cash raises a current ratio that is already above 1.0 and lowers one that is below 1.0.

Bonding capacity

Some sureties express a bonding program as a multiple of working capital (or of adjusted net worth). The multiple varies by surety and contractor; the exam will give it to you.

Example. A surety will support work up to 10 times working capital. Current assets are $620,000 and current liabilities are $380,000.

Working capital = $620,000 − $380,000 = $240,000. Capacity = 10 × $240,000 = $2,400,000.

Applying the multiple to current assets alone ($6,200,000) is the trap. More on sureties in bonds and insurance.

Other ratios you may see

• Return on equity = net income ÷ owner's equity
• Gross profit margin = gross profit ÷ revenue
• Net profit margin = net income ÷ revenue
• Debt to total assets = total liabilities ÷ total assets (in the example, $500,000 ÷ $800,000 = 0.625)

Where to find it in your book

The Builder's Guide to Accounting (Craftsman, 2001) is the accounting book on the official B&F reference list. If you find the ratio formulas in it, highlight them so you can confirm one quickly, but aim to know them without looking.

Practice ratio problems

Our Florida Business and Finance Exam Prep includes original ratio and balance sheet questions with each step worked out, plus 90 days of practice across the full exam. Related: time value of money, depreciation and the B&F exam overview.