The cash ratio is used to assess a company's ability to pay its immediate liabilities. It assesses if it has sufficient liquidity to carry on with operations. In comparison to the current ratio and quick ratio, the cash ratio is the most conservative liquidity ratio.
The response is 0.80. (Cash + Cash Equivalents) / Total Current Assets is the formula for calculating the cash ratio. This computation excludes accounts receivable. (20,000 + 4,000) / 30,000 = 0.80 is the cash ratio. An organization will be able to cover its current liabilities with cash and cash equivalents and still have money left over if its ratio is greater than 1.
The cash ratio is a stricter, more conservative indicator of a company's liquidity than the current ratio, which has more assets in the numerator. In financial reporting or by analysts performing a fundamental examination of a company, the cash ratio is not frequently used.
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