2A - Cash Equivalent

Question 1

What is the cash equivalent definition?

Answer 1

ST, highly liquid items easily convertible to cash. 90 days or less maturity

Question 2

Give examples of cash equivalent

Answer 2

Money market funds, deposits that are not legally restricted, negotiable paper, CDs (less than 90 day maturity)

Question 3

Are post dated checks cash equivalents?

Answer 3

No, it is still an A/R

Question 4

What is the defensive interval ratio?

Answer 4

It is a measure of time the company can survive (continue to pay operating expenses in cash) using only the quick assets (cash, marketable securities, and net accounts receivable). It is computed by dividing total quick assets by average daily cash expenditures

Question 5

Is the defensive interval ratio useful for determining liquidity purposes?

Answer 5

Yes, since it calculates how long a company can keep up with its debts with its quick assets

Question 6

What is the acid test ratio formula?

Answer 6

(Cash + Net Receivables + Marketable Securities) / Current Liabilities