Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Types of Receivables

Financial Accounting

7. Receivables and Investments

Types of Receivables

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Multiple Choice

The cash ratio is found by dividing cash and cash equivalents by which of the following?

Total liabilities

Accounts receivable

Total assets

Current liabilities

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Verified step by step guidance

Understand the concept of the cash ratio: The cash ratio is a liquidity metric that measures a company's ability to pay off its short-term obligations using only its most liquid assets, specifically cash and cash equivalents.

Identify the formula for the cash ratio: The formula is \( \text{Cash Ratio} = \frac{\text{Cash and Cash Equivalents}}{\text{Current Liabilities}} \). This formula highlights the relationship between cash and cash equivalents and current liabilities.

Clarify the components of the formula: Cash and cash equivalents include assets like physical cash, bank balances, and short-term investments that can be quickly converted into cash. Current liabilities are obligations the company must settle within one year, such as accounts payable, short-term debt, and accrued expenses.

Eliminate incorrect options: Total liabilities include both current and long-term liabilities, which are not relevant for the cash ratio. Accounts receivable are not cash or cash equivalents, and total assets include all assets, not just liquid ones. Therefore, these options are incorrect.

Conclude that the denominator in the cash ratio formula is current liabilities, as it represents the short-term obligations the company needs to cover using its liquid assets.