Question 8.5: Ratio of Cash to Monthly Cash Expenses Financial data for Ch......
Ratio of Cash to Monthly Cash Expenses
Financial data for Chapman Company are as follows:
a. Compute the ratio of cash to monthly cash expenses.
b. Interpret the results computed in (a).
|
For Year Ending December 31, 2012 |
||
| Cash on December 31, 2012 | $102,000 | |
| Cash flow from operations | (144,000) | |
a. Monthly Cash Expenses = \frac{Negative Cash Flow from Operations}{12} = \frac{\$ 144,000}{12} = $12,000 per month
Ratio of Cash to
Monthly Cash Expenses = \frac{Cash as of Year-End}{Monthly Cash Expenses} = \frac{\$ 102,000}{\$ 12,000 per month} = 8.5 months
b. The preceding computations indicate that Chapman Company has 8.5 months of cash remaining as of December 31, 2012. To continue operations beyond 8.5 months, Chapman Company will need to generate positive cash flows from operations or raise additional financing from its owners or by issuing debt.