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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 follow:

For Year Ended
December 31
Cash on December 31 $ 102,000
Cash flow from operations 144,000

a. Compute the ratio of cash to monthly cash expenses.
b. Interpret the results computed in (a).

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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. 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.

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