The Metro Construction Company had the following financial data as of December 31, 2018:
Cash and cash equivalents $120,000
Total current liabilities 80,000
a. What is the cash ratio as of December 31, 2018? Show the formula and your computations.
b. Comment on the cash ratio for Metro Construction Company.
a. Cash ratio = (Cash + Cash equivalents)/Total current liabilities
= ($90,000 + $30,000)/$80,000
= 1.5
b. The cash ratio is used to measure a company's ability to meet its short-term obligations. This ratio is the most conservative valuation of liquidity because it only includes cash and cash equivalents. Metro's cash ratio exceeds 1.0. This ratio indicates that the company has a sufficient supply of cash and cash equivalents to pay current liabilities. Since the ratio exceeds one, this may indicate that Metro has an unnecessarily large amount of cash and cash equivalents.
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