Question

I want to know about the Cash ratio. Please elaborate about it. Pl explain with example how to calculate it and why is it important for the companies.

There are three subparts of this question. Please answer in exact 7 sentences.

Answer 1

  

   Cash ratio = (Cash & cash equivalents + Marketable securities) / Current liabilities

• it is the ratio between cash and current liabilities .cash& cash equivalents and marketable securities are included in the numerator along with cash for purpose of calculating this
• if the company has enough cash & marketable security to cover the current liabilities the cash ratio will be 1. other wise less than 1
• examples of marketable securities like commercial paper,banker's acceptance,t bill, and money market instruments etc....

• Example :-

cash and cash equivalents = $130000

Marketable securities = $190000

inventories = $380000

current liabilities = 490000

Cash ratio = (cash& cash equivalents+ marketable securities) / current liabilities

=(130000+190000) / 490000

=320000/490000

= 0.65