Question

The ratio of cash to monthly cash expenses is computed as _____.

a. Cash as of year-end divided by monthly cash expenses
b. Beginning cash balance divided by ending cash balance
c. Cash and cash equivalents divided by cash as of year-end
d. None of these choices are correct

Answer 1

The ratio of cash to monthly cash expenses is computed as cash as of year-end divided by monthly cash expenses. This ratio provides insight into liquidity and one's ability to cover recurring expenses.

Step-by-step explanation:

The ratio of cash to monthly cash expenses is computed as cash as of year-end divided by monthly cash expenses. This calculation helps a business or individual assess their liquidity over the period of a month by understanding how many times their available cash can cover their recurring monthly expenses. For instance, if a person's take-home pay is $50,000 per year, and their monthly expenses for rent and groceries are $2,000 and $1,000 respectively, they can calculate their discretionary spending by either dividing the annual figure by 12 to get a monthly income and then subtracting monthly expenses, or multiply monthly expenses by 12 to subtract from the annual figure and then divide by 12, both yielding approximately more than $1,000 per month for discretionary spending.