Question

Fred is the owner of a local feed store. Which one of the following ratios should he compute if he wants to know how long the store can pay its bills given the amount of cash the store currently has?

a. Current ratio
b. Inventory turnover ratio
c. Accounts receivable turnover ratio
d. Cash ratio

Answer 1

Fred should compute the Cash ratio to know how long his store can pay its bills given the amount of cash the store currently has.

Step-by-step explanation:

If Fred wants to know how long his store can pay its bills using the amount of cash the store currently has, he should compute the Cash ratio. The Cash ratio is a financial ratio that compares a company's cash and cash equivalents to its current liabilities. It indicates the company's ability to cover its short-term liabilities with its available cash.

The formula for the Cash ratio is:

Cash ratio = (Cash + Cash Equivalents) / Current Liabilities

Fred can use this ratio to assess whether the store has enough cash to meet its immediate payment obligations.