When a company reports negative net cash flows from operations _____.
A) ratio of equity to annual cash expenses helps in assessing the survival of the company
B) ratio of equity to monthly cash expenses helps in assessing the survival of the company
C) ratio of cash to monthly cash expenses helps in assessing the survival of the company
D) ratio of accounts payable to annual financing expenses helps in assessing the survival of the company

Question

Quizplus · Accepted Answer

When a company reports negative net cash flows from operations, it means that the company is spending more cash than it is generating from its operations. In this situation, it is important to assess the company's ability to survive and continue operating. One useful ratio for this purpose is the ratio of cash to monthly cash expenses, which measures how many months the company can continue to operate with its current cash on hand. This ratio gives a clearer picture of the company's short-term liquidity and its ability to meet its obligations.

When a Company Reports Negative Net Cash Flows from Operations