The cash ratio is Cash + Cash Equivalents + Short-Term Securities Owned Current Liabilities If the company purchases materials on account, current liabilities will increase. The numerator of the ratio will remain the same while the denominator increases, which will cause the ratio to decrease.
The cash ratio is Cash + Cash Equivalents + Short-Term Securities Owned Current Liabilities Commercial paper is a cash equivalent. If the company purchases commercial paper with cash, the purchase will cause a decrease in cash and an equal increase in cash equivalents. Neither the numerator nor the denominator of the cash ratio will change and thus the cash ratio will not change.
The cash ratio is Cash + Cash Equivalents + Short-Term Securities Owned Current Liabilities Selling goods for cash will cause the numerator of the ratio to increase because cash will increase. That will be true whether the goods are sold at a price lower than cost or higher than cost. The denominator will not change as a result of the sale. Thus the cash ratio will increase, not decrease.
The cash ratio is Cash + Cash Equivalents + Short-Term Securities Owned Current Liabilities The numerator and the denominator of the ratio will increase by equal amounts as a result of the short-term loan. Whether the cash ratio would increase or decrease depends upon whether the numerator or the denominator of the ratio had been greater before the money was borrowed. If the numerator had been greater than the denominator, an equal increase in the numerator and denominator will cause a decrease in the cash ratio. For example, if the numerator were 100 and the denominator were 75, the cash ratio would be 1.33. If the amount of the loan were 20, the numerator would increase to 120 and the denominator would increase to 95. The cash ratio would decrease to 1.26. If the denominator had been greater than the numerator, an equal increase in the numerator and denominator will cause an increase in the cash ratio. If the numerator were 75 and the denominator were 100, the cash ratio would be .75. An equal increase of 20 would cause the numerator to increase to 95, the denominator to increase to 120, and the cash ratio to increase to .79. This occurs because an equal increase in the numerator and the denominator of any ratio will represent a smaller proportional increase to the larger number than to the smaller number. If the larger number is in the numerator, it will cause the ratio to decrease. If the larger number is in the denominator, it will cause the ratio to increase.
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