Q18RQ - Horngren'S Financial And Managerial Accounting

Question

What does the cash ratio help determine, and how is it calculated?

Step-by-Step Solution

Answer

To determine the ability of the company to pay current liabilities.

Step 1: Definition of cash ratio

The cash ratio is the ratio used to determine the ability of the company to pay its current liabilities from cash.

Step 2: Cash ratio determines

The cash ratio is a very important ratio for the company because, with the help of this ratio, its ability is determined to pay its current liabilities from cash. The cash ratio shows the ability to pay current liabilities without selling its asset.

The cash ratio is calculated by using this formula:

$\mathrm{Cash} \mathrm{ratio} = \frac{\mathrm{Cash} + \mathrm{Cash} \mathrm{Equivalents}}{\mathrm{Current} \mathrm{Liabilities}}$