Given the following data: Current assets = 500; Current liabilities = 250; Inventory = 200; Account receivables = 200; calculate the cash ratio: (assume that the firm has no marketable securities)
A) 0.4
B) 2.0
C) 1.5
D) None of the above

Question

Quizplus · Accepted Answer

The cash ratio is calculated by dividing cash and cash equivalents by current liabilities. Since the firm has no marketable securities, the only relevant current asset is cash. Therefore, the cash ratio is calculated as:
Cash Ratio = (Cash and Cash Equivalents) / Current Liabilities
Cash Ratio = (0 + Accounts Receivable + Inventory) / Current Liabilities
Cash Ratio = (0 + 200 + 200) / 250
Cash Ratio = 0.8
Since the question specifically asks for the cash ratio (not the quick ratio), the correct answer is A) 0.4.

Given the Following Data: Current Assets = 500; Current Liabilities