Q7-7TI - Horngren'S Financial And Managerial Accounting

Question

The Scott Sun & Shade Company had the following financial data at December 31, 2018:

Cash and cash equivalents $ 60,000

Total current liabilities 75,000

What is the cash ratio as of December 31, 2018, for Scott Sun & Shade?

Step-by-Step Solution

Answer

Answer:

The cash ratio of the company is 0.80. 

Step 1: Definition of cash ratio

The cash ratio is a ratio that indicates the financial ability of the business to repay the current obligations from the cash and cash equivalents

Step 2: Calculation of cash ratio

The cash ratio of the company is calculated by diving cash and cash equivalent by current liabilities.

 $$\begin{gathered} Cash Ratio=\frac{Cash and Equivalent}{Current Liabilities} \\ =\frac{\$60,000}{\$75,000} \\ =0.80 \end{gathered}$$