Question

Espinoza Air Conditioning & Heating had the following select financial data as of June 30, 2018.

Cash $10,000
Cash Eq. $8850
Acc. Rec. $3,700
Total Current Liabilities $29,000
What's the formula for cash ratio? What is Espinoza's cash ratio?
a) 0.34
b) 0.65
c) 0.78
d) 1.54

Answer 1

The correct answer is option b. The cash ratio is calculated by adding a company's cash and cash equivalents and dividing by its total current liabilities. For Espinoza Air Conditioning & Heating, with cash of $10,000 and cash equivalents of $8,850, against total current liabilities of $29,000, the cash ratio is 0.65.

Step-by-step explanation:

Cash Ratio Calculation

The cash ratio is a liquidity ratio that measures a company's ability to pay off its short-term debt obligations with its most liquid assets. The formula for the cash ratio is:

Cash Ratio = (Cash + Cash Equivalents) / Total Current Liabilities

To calculate Espinoza Air Conditioning & Heating's cash ratio, we use the given financial data:

Cash: $10,000
Cash Equivalents: $8,850
Accounts Receivables: $3,700 (Note: This is not included in the cash ratio calculation)
Total Current Liabilities: $29,000

Now, adding the company's cash and cash equivalents and then dividing by the total current liabilities we get:

Cash Ratio = ($10,000 + $8,850) / $29,000

Cash Ratio = $18,850 / $29,000

Cash Ratio = 0.65

Therefore, the correct answer is b) 0.65.