Please describe the cash ratio with example. Why this term is useful in accounting? It should...

Question

Question

Please describe the cash ratio with example. Why this term is useful in accounting?

It should be exact 7 sentences with concrete explanation.

Answer 1

Answer #1

Cash ratio is the most stringent of liquidity ratios. It is obtained

by dividing the firm's total cash and cash equivalents by the

current liabilities.

Cash and cash equivalents include cash on hand, demand deposits,

marketable securities, etc; those than can be converted without

delay and loss to cash.

It indicates a firm's ability to meet its current liabilities at a very

short notice. It could be used when a firm is about to go out of

business.

Suppose a firm has $10000 in cash and $5000 in marketable

securities and its current liabilities are $20000. The cash ratio

would then be 15000/20000 = 0.75

Answer 2

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