If a company's net cash flows from operating activities is $1,500,000 for a year and its end of the year cash and cash equivalents balance is $750,000, determine the company's ratio of cash to monthly cash expenses.
A) 6 months
B) 2 months
C) 5 months
D) 9 months

Question

Quizplus · Accepted Answer

The ratio of cash to monthly cash expenses is calculated by dividing the end of the year cash and cash equivalents balance by the average monthly cash expenses. Given the net cash flows from operating activities is $1,500,000 for the year, this implies monthly cash flows from operations of $1,500,000 / 12 = $125,000. With an end of the year cash and cash equivalents balance of $750,000, the ratio is $750,000 / $125,000 = 6 months.

If a Company's Net Cash Flows from Operating Activities Is