Q711SE - Horngren'S Financial And Managerial Accounting

Question

Computing the cash ratio Smythe Banners reported the following figures in its financial statements:

Cash $ 26,500 Cash Equivalents 5,000 Total Current Liabilities 30,000 Compute the cash ratio for Smythe Banners.

Step-by-Step Solution

Answer

The current ratio is 1.05:1 ss

Step-by-Step Solution Step 1: Definition of cash ratio

The cash ratio is a ratio that is used to calculate the company’s ability to pay its current liabilities.

Step 2: Calculation of cash ratio

The cash ratio of the calculated by adding the cash and cash equivalent of the company after this the amount is divided by the total current liabilities to calculate the cash ratio.

$$\begin{gathered} \mathrm{Cash} \mathrm{Ratio} = \frac{\mathrm{Cash} + \mathrm{Cash} \mathrm{Equivalents}}{\mathrm{Total} \mathrm{Current} \mathrm{liabilities}} \\ \mathrm{Cash} \mathrm{Ratio} =\frac{\$26,500+\$5,000}{\$30,000} \\ \mathrm{Cash} \mathrm{Ratio} =1.05:1 \end{gathered}$$

Hence the cash ratio of the company is 1.05:1