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).

Question

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).

Accepted Answer

a. [latex]Monthly Cash Expenses=\frac{Negative Cash Flow from Operations}{12}=\frac{ \$ 144,000}{12}= \$ 12,000 per month [/latex]

[latex]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 [/latex]

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.

Question 8.5: Ratio of Cash to Monthly Cash Expenses Financial data for Ch...

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