PE 8-5A Ratio of cash to monthly cash expenses

Financial data for Hauser Company are shown below.


For Year Ending December 31, 2012

Cash on December 31, 2012 $ 58,800
Cash flow from operations (72,000)

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

Answer:

a.
Monthly Cash Expenses = Negative Cash Flow from Operations / 12
= $72,000/12 = $6,000 per month
Ratio of Cash to Monthly Cash Expenses
=  Cash as of Year-End/ Monthly Cash Expenses
=  $58,800/$6,000 per month
= 9.8 months


b. The preceding computations indicate that Hauser Company has 9.8 months of cash remaining as of December 31, 2012. Hauser Company will need to generate positive cash flow from operations or raise additional financing from its owners or by issuing debt.

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