1
9
Cash
Learning Objectives
Unit 9
1. Establish and account for a Change
Fund.
2. Establish and account for a Petty
Cash Fund.
3. Describe the use of commercial
banking services for cash
transactions.
4. Analysis: Compute and explain
liquidity measures, the doomsday
ratio and the quick or acid test ratio
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2
Cash and Cash
Equivalents
Note that the
term “cash”
implies both
cash and cash
equivalent
accounts.
Cash equivalents:
•Short term investments that are
highly liquid
•Able to be converted to known
amounts of cash. (maturities of 3
months or less)
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3
Cash and Cash
Equivalents
Examples of cash equivalents are
•Treasury bills
•Money market funds
•Bank deposits and *commercial paper
*(issued by public corporations)
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4
Objective 9.1:
Establish and account
for a Change Fund.
O9.1
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Establish Change Fund
KAYOKO'S GIFTS
BALANCE SHEET
As of 12/31/07
ASSETS
Cash
Change Fund
Accounts Receivable
Inventory
Supplies
Current assets
Equipment
Total
14,650
0
1,240
104,500
2,100
122,490
54,650
299,630
LIABILITIES
Accounts Payable
Current liabilities
Notes Payable
Total
EQUITY
Owner, Capital
Total
45,000
45,000
16,500
61,500
238,130
299,630
The Chart of Accounts
is modified to include a
new ledger account
“Change Fund”
O9.1
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Establish Change Fund
KAYOKO'S GIFTS
BALANCE SHEET
As of 12/31/07
ASSETS
Cash
Change Fund
Accounts Receivable
Inventory
Supplies
Current assets
Equipment
Total
14,500
150
1,240
104,500
2,100
122,490
54,650
299,630
LIABILITIES
Accounts Payable
Current liabilities
Notes Payable
Total
EQUITY
Owner, Capital
Total
45,000
45,000
16,500
61,500
238,130
299,630
A journal entry moves
the change fund total
from Cash to “Change
Fund”
O9.1
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Establish Change Fund
GENERAL JOURNAL
Date
Description
14-Sep
PR
¢Change Fund
Page 15
Debit
105
Credit
150.00
100
¢Cash
150.00
Establish Change Fund
LEDGER
Account Nam e: ¢ CASH
Date
2007
Item
Balance Forward
1 4-Sep
Acct #: 100
Post
Ref.
BALANCE
Debit
Credit
J15
1 4-Sep
O9.1
Item
Credit
14,650.00
LEDGER
150.00 14,500.00
Account Nam e: ¢ CHANGE FUND
Date
2007
Debit
Post
Ref.
J15
Acct #: 105
BALANCE
Debit
150.00
Credit
Debit
Credit
150.00
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Change Fund Controls:
Some of the important controls to consider when
dealing with cash drawers are:
• Individual responsibility
• Segregation of duties
The cashier must accept responsibility for the change
fund and cash received. The cashier should not be
allowed to record the results of cash sales activities
into the accounting system.
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At any point in
time, the total
of the cash
register tape
for sales plus
the beginning
change fund
should equal
the total
ending cash
count.
Change Fund Equation
9
Cash Register
$
Sales total
Beginning Change Fund
10.00
28.00
7.00
98.00
43.00
189.00
Register Tape Sales total
$
O9.1
Ending Cash Count
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Change Fund Example
Register tape sales total for the cashier’s shift
$895
Ending cash count $1043
Sales total
10.00
28.00
7.00
98.00
43.00
895.00
$
Using the equation, beginning change fund + register
tape sales should equal ending cash count however,
$150
895
$1045
Therefore, cash is short $2 and the Cash Short and Over
account will be used to record this expense (debit). If the
cash count exceeded $1045, the Cash Short and Over
account would have been used to record the gain (credit).
O9.1
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Journalize
Cash Sales
•The cash count total
of $1,043 is not
journalized.
•We simply record
the effect on the
regular cash account
with a debit for the
actual increase in
cash $1,043 - $150 =
$893
•No entry is made to
the Change Fund
except to increase or
decrease it.
O9.1
GENERAL JOURNAL
Date
Description
Page 15
Debit
PR
15-Sep ¢Cash
¢Cash Short & Over
Credit
100
893.00
599
2.00
400
¢Sales
895.00
LEDGER
Account Nam e: ¢ CASH
Date
2007
Item
Acct #: 100
Post
Ref.
BALANCE
Debit
Debit
Credit
14,500.00
Balance Forward
1 5-Sep
Credit
J15
893.00
15,393.00
LEDGER
Account Nam e: ¢ SALES
Date
2007
Item
Acct #: 400
BALANCE
Post
Ref.
Debit
Credit
Debit
Credit
56,340.00
Balance Forward
1 5-Sep
J15
895.00
57 ,235.00
LEDGER
Account Nam e: ¢ CASH SHORT & OVER
Date
2007
1 5-Sep
Item
Post
Ref.
Acct #: 599
BALANCE
Debit
Credit
Debit
Credit
3.00
Balance Forward
J15
2.00
5.00
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Change Fund Problem
• End of day register tape cash sales total is
$558.25
• Cash count is $759.25
• Change Fund is $200
Journalize the day’s cash revenue
O9.1
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Journalize
Cash Sales
GENERAL JOURNAL
Date
Description
•The actual
increase in cash is:
$759.25 minus
$200 = $559.25.
•Record the
increase in cash,
the day’s sales total
and balance the
entry with Cash
Short & Over as
necessary.
O9.1
Debit
PR
15-Sep ¢Cash
100
¢Cash Short & Over
¢Sales
•The cash count
total of $759.25
isn’t journalized.
Page 15
Credit
559.25
599
1.00
400
558.25
LEDGER
Account Nam e: ¢ CASH
Date
2007
Item
Acct #: 100
Post
Ref.
BALANCE
Debit
Credit
17 ,400.00
Balance Forward
1 5-Sep
Debit
Credit
J15
559.25
17 ,959.25
LEDGER
Account Nam e: ¢ SALES
Date
2007
Item
Acct #: 400
Post
Ref.
BALANCE
Debit
Credit
Debit
Credit
41,800.00
Balance Forward
1 5-Sep
J15
558.25
42,358.25
LEDGER
Account Nam e: ¢ CASH SHORT & OVER
Date
2007
1 5-Sep
Item
Post
Ref.
Acct #: 599
BALANCE
Debit
Credit
Debit
Credit
3.00
Balance Forward
J15
1.00
2.00
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Objective 9.2: Establish
and account for a
Petty Cash Fund.
Cash is called “liquid” for a good
reason. It flows easily and must
be protected carefully by firms.
However small or “petty”, theft of
petty cash over time can seriously
damage an unsuspecting firm.
O9.2
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Establish Petty Cash
THOMPSON'S EQUIPMENT
BALANCE SHEET
As of 12/31/07
ASSETS
Cash
Petty Cash
Accounts Receivable
Inventory
Supplies
Current assets
Equipment
Total
55,750
0
88,000
125,600
1,200
270,550
75,400
616,500
LIABILITIES
Accounts Payable
Current liabilities
Notes Payable
Total
166,700
166,700
185,000
351,700
EQUITY
Owner, Capital
Total
264,800
616,500
The Chart of Accounts
is modified to include a
new ledger account
“Petty Cash”
O9.2
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Establish Petty Cash
THOMPSON'S EQUIPMENT
BALANCE SHEET
As of 12/31/07
ASSETS
Cash
Petty Cash
Accounts Receivable
Inventory
Supplies
Current assets
Equipment
Total
55,500
250
88,000
125,600
1,200
270,550
75,400
616,500
LIABILITIES
Accounts Payable
Current liabilities
Notes Payable
Total
166,700
166,700
185,000
351,700
EQUITY
Owner, Capital
Total
264,800
616,500
A journal entry moves
the petty cash amount
from Cash to “Petty
Cash”
O9.2
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Establish Petty Cash
GENERAL JOURNAL
Date
Description
14-Sep
PR
¢Petty Cash
Page 15
Debit
110
Credit
250.00
100
¢Cash
250.00
Establish Petty Cash Fund
LEDGER
Account Nam e: ¢ CASH
Date
2007
Item
Balance Forward
1 4-Sep
Acct #: 100
Post
Ref.
BALANCE
Debit
Credit
J15
1 4-Sep
O9.2
Item
Credit
55,7 50.00
LEDGER
250.00 55,500.00
Account Nam e: ¢ PET T Y CASH
Date
2007
Debit
Post
Ref.
J15
A cct #: 110
BALANCE
Debit
250.00
Credit
Debit
Credit
250.00
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Petty Cash Controls
•Petty Cash Officer has individual responsibility for Petty
Cash.
•Require vouchers for disbursement of petty cash.
•Vouchers signed by Petty Cash Officer and the individual
in the firm receiving the cash.
•The Petty Cash Officer not allowed to receive
disbursements without second signature.
•The Petty Cash Officer doesn’t record the reimbursement
of petty cash in the accounting system.
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At any point in
time the total of
the cash count
plus vouchers
in the petty
cash drawer
should equal
the
total in the
Petty Cash
Fund.
Petty Cash
Equation
Petty Cash Drawer
Petty Cash
Vouchers
$
Total of the established
Petty Cash Fund
O9.2
(Assumes no decrease or increase in cash due
to error or theft.)
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Petty Cash Voucher Example
PETTY CASH VOUCHER
No.
Date:9-15-07
4
Paid to:
Western Office Supplies
For:
$
31.25
Printer cartridges
Account: Office Supplies
Approved by
Cass Elliot
Cash received by
Mervin Purvis
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Petty Cash Reimbursement
Petty Cash fund:
Vouchers:
9/14
9/15
9/20
9/24
Paid
Paid
Paid
Paid
21
$250:
$111 for postage
$25 for delivery services
$87 for office supplies
$6 for key duplication
Petty Cash
Vouchers
Vouchers total $229. Total cash count on 9/30 is $20
Using the equation, vouchers + cash count should equal $250,
however,
$229
20
$249
Therefore, cash is short $1 and the Cash Short and Over
account will be used to record this loss (debit). Journal
entries follow. . .
O9.2
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Journalize Reimbursement of Petty Cash
GENERAL JOURNAL
Date
Description
PR
30-Sep ¢Postage Expense
22
Page 15
Debit
Credit
570
111.00
¢Miscellaneous Expense
580
25.00
¢Supplies
160
87.00
¢Miscellaneous Expense
580
6.00
¢Cash Short & Over
580
1.00
230.00
¢Cash
LEDGER
Account Nam e: ¢ CASH
Date
2007
Item
Acct #: 100
Post
Ref.
BALANCE
Debit
Credit
J15
LEDGER
230.00 17 ,37 0.00
Account Nam e: ¢ SUPPLIES
Date
2007
O9.2
30-Sep
Item
Credit
17 ,600.00
Balance Forward
30-Sep
Debit
Acct #: 160
Post
Ref.
BALANCE
Debit
Credit
Debit
Credit
57 5.00
Balance Forward
J15
87 .00
662.00
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Journalize Reimbursement of Petty Cash
GENERAL JOURNAL
Date
Description
30-Sep ¢Postage Expense
Page 15
Debit
PR
Credit
570
111.00
¢Miscellaneous Expense
580
25.00
¢Supplies
160
87.00
¢Miscellaneous Expense
580
6.00
¢Cash Short & Over
580
1.00
LEDGER
¢Cash
230.00
Account Nam e: ¢ POST AGE EXPENSE
Date
2007
Item
Post
Ref.
Acct #: 570
BALANCE
Debit
Credit
J15
LEDGER
111.00
30-Sep
O9.2
Item
Credit
47 9.00
Account Nam e: ¢ MISCELLANEOUS EXPENSE
Date
2007
Debit
368.00
Balance Forward
30-Sep
23
Post
Ref.
Acct #: 580
BALANCE
Debit
Credit
Debit
Credit
118.00
Balance Forward
J15
25.00
143.00
J15
6.00
149.00
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Journalize Reimbursement of Petty Cash
GENERAL JOURNAL
Date
Description
Page 15
Debit
PR
30-Sep ¢Postage Expense
Credit
570
111.00
¢Miscellaneous Expense
580
25.00
¢Supplies
160
87.00
¢Miscellaneous Expense
580
6.00
¢Cash Short & Over
580
1.00
¢Cash
230.00
LEDGER
Account Nam e: ¢ CASH SHORT & OVER
Date
2007
30-Sep
O9.2
Post
Ref.
Item
24
Acct #: 599
BALANCE
Debit
Credit
Debit
Credit
3.00
Balance Forward
J15
1.00
4.00
The Cash Short and Over account is
used to balance the entry. If a credit
entry is required in Cash Short and
Over, a gain is indicated.
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Objective 9.3:
Describe the use of
commercial banking services
for cash transactions
O9.3
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Bank Services involving cash
transactions
Deposit Products-checking and savings
Payroll tax deposit services
Electronic funds transfers
Cash management
Online banking
O9.3
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Payment Process Using
Checks
PAY TO THE ORDER OF
COAST NATIONAL BANK
Restrictive Endorsement
Should be used to limit the
ability of third parties to cash
the check.
FOR DEPOSIT ONLY
Penny & Lee Espresso
Show me
the money!
$
______CHECK
______CHECK
______________
______________
DRAWER
O9.3
PAYEE
DRAWEE
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Who is keeping track of the
cash?
Firms that use bank checking deposit
services actually have two parties that
keep track of the firm’s cash balances –
1)the firm itself and, 2)the firm’s bank.
As a result, the firm must regularly
compare the two balances and confirm
any reasons for differences. This
process is called reconciliation
O9.3
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Bank Reconciliation
Bank Cash Balance
Ledger Cash Balance
Actual Cash Balance
O9.3
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Why is there a difference?
??
COAST NATIONAL BANK
Account #:
3489723
VALLEYWOOD, CA 90090 (310) 333-4444
9/1/07 to 9/30/07
Penny & Lee Espresso
Beginning balance:
16,543.77
123 Latte Drive
Net activity
840.98
Valleyw ood, CA 90090
Ending balance:
17,384.75
Date
Checks & Other Debits Deposits & Other CreditsBalance
Ck No.
Amount
Amount
16,543.77
1-Sep
1105
36.34
16,507.43
3-Sep
1106
1,236.44 Deposit
11,200.40 26,471.39
3-Sep
856.50
25,614.89
6-Sep
1107
2,358.94
23,255.95
7-Sep
1108LEDGER112.00
23,143.95
8-Sep
100.00 23,243.95
Account Nam e: ¢ CASH 12-Sep
Acct #: 100 19,776.63
1109
3,467.32
12-Sep
1111
12.60
19,764.03
BALANCE
15-Sep Post
1112
345.00
19,419.03
Debit
Credit
Deposit
8,674.25 28,093.28
Date
Item 16-Sep Ref.
Debit
Credit
19-Sep
1114
12,679.75
9/30/07 Balance Forward
18,063.02 15,413.53
21-Sep
1115
75.33
15,338.20
22-Sep
1,256.00 16,594.20
22-Sep
1116
4,610.45
11,983.75
26-Sep
Deposit
5,400.00 17,383.75
30-Sep
27.50 17,411.25
30-Sep
26.50
17,384.75
Ending balance:
17,384.75
O9.3
Checking Statement -Page 1
Activity
Deposits:
25,274.65
Withdraw als: 24,934.17
Other Dr & Cr:
500.50 Cr
Explanation
NSF 8/25 deposit item
Error 8/25 deposit
Collection 7/24 deposit item
Interest earned on deposits
Bank service fee -checking
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Why is there a difference?
The firm’s cash balance (book or ledger
balance); and the bank’s cash balance
are usually not the same due to timing
differences.
•The firm makes changes to its’ cash
balance that will take some time to
reach the bank and;
O9.3
•The bank make changes to the firm’s
deposit balances that take some time to
reach the firm
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The Firm
What changes does
the firm initiate?
32
The firm records:
•Checks issued -credit to cash
•Cash received for deposit -debit to cash
Until the bank receives this information
these changes are called:
•Outstanding checks
•Deposits in transit
O9.3
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What changes* does the
bank initiate?
33
The bank may add to the cash balance for:
•Electronic funds transferred in
•Interest paid for deposit balances
•Collection of notes and NSF checks
The bank may deduct cash for:
•Service fees
•Returned NSF checks previously deposited
*These changes are communicated to the firm in the monthly statement
O9.3
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Bank
Reconciliation
Adjustments
to the Bank
and the
Ledger
Balance
Must result in
the same
adjusted cash
balance to
reconcile.
Checking Statement -Page 1
COAST NATIONAL BANK
Account #:
3489723
VALLEYWOOD, CA 90090 (310) 333-4444
9/1/07 to 9/30/07
Penny & Lee Espresso
Beginning balance:
16,543.77
123 Latte Drive
Net activity
840.98
Valleyw ood, CA 90090
Ending balance:
17,384.75
Date
Checks & Other Debits Deposits & Other CreditsBalance
Ck No.
Amount
Amount
16,543.77
1-Sep
1105
36.34
16,507.43
3-Sep
1106
1,236.44 Deposit
11,200.40 26,471.39
3-Sep
856.50
25,614.89
6-Sep
1107
2,358.94
23,255.95
7-Sep
1108
112.00
23,143.95
8-Sep
100.00 23,243.95
12-Sep
1109
3,467.32
19,776.63
12-Sep
1111
12.60
19,764.03
15-Sep
1112
345.00
19,419.03
16-Sep
Deposit
8,674.25 28,093.28
19-Sep
1114
12,679.75
15,413.53
21-Sep
1115
75.33
15,338.20
22-Sep
1,256.00 16,594.20
22-Sep
1116
4,610.45
11,983.75
26-Sep
Deposit
5,400.00 17,383.75
30-Sep
27.50 17,411.25
30-Sep
26.50
17,384.75
Ending balance:
17,384.75
34
NSF 8/25 deposit item
Error 8/25 deposit
Collection 7/24 deposit item
Interest earned on deposits
Bank service fee -checking
BANK STATEMENT RECONCILIATION
A review of the checks issued by the firm indicates Ck #1110 for $323.00 and #1113
for $86.23 are outstanding and a 9/30 deposit of $1,488.00 has not been received by
the bank. The deposit error was made by the bank.
Bank Statement Balance
Statement ending balance
Add:
Deposits in transit
Deduct:
Checks outstanding
O9.3
Checking Statement -Page 1
Activity
Deposits:
25,274.65
Withdraw als: 24,934.17
Other Dr & Cr:
500.50 Cr
Explanation
Adjusted balance:
17,384.75
1,488.00
409.23
18,463.52
Ledger Balance
As of statement date
Add:
NSF collected
Interest earned
Deduct:
Returned deposit -NSF
Service fee
Adjusted balance
18,063.02
1,256.00
27.50
856.50
26.50
18,463.52
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35
Journalize
adjustments
GENERAL JOURNAL
All of the
adjustments
to the ledger
cash balance
must be
formally
entered into
the
accounting
system to
complete the
bank
reconciliation
Date
Description
Debit
PR
6-Oct ¢T. Sim, Receivable -NSF
¢Misc Expense -Bank fees
Credit
175/P
856.50
580
26.50
100
¢Cash
883.00
100
¢Cash
¢Interest Income
1,283.50
450
¢B. Pal, Receivable -Collected
27.50
175/P
1,256.00
LEDGER
Account Nam e: ¢ INT EREST INCOME
Date
2007
Item
Acct #: 450
BALANCE
Post
Ref.
Debit
Credit
Debit
Credit
89.55
Balance Forward
6-Oct
J9
27 .50
117 .05
LEDGER
Account Nam e: ¢ MISCELLANEOUS EXPENSE
Date
2007
6-Oct
O9.3
Page 9
Item
Post
Ref.
Acct #: 580
BALANCE
Debit
Credit
Debit
Credit
268.00
Balance Forward
J9
26.50
294.50
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36
Journalize
Adjustments
GENERAL JOURNAL
Date
When this
posting is
complete, the
resulting
cash balance
should reflect
all the
information
to date as to
the true cash
balance
Description
PR
6-Oct ¢T. Sim, Receivable -NSF
Page 9
Debit
Credit
175/P
856.50
580
26.50
¢Misc Expense -Bank fees
100
¢Cash
100
¢Cash
¢Interest Income
883.00
1,283.50
450
¢B. Pal, Receivable -Collected
27.50
175/P
1,256.00
LEDGER
Account Nam e: ¢ CASH
Date
2007
Item
Acct #: 100
Post
Ref.
BALANCE
Debit
Debit
Credit
18,063.02
Balance Forward
6-Oct
J9
1,283.50
LEDGER
19,346.52
883.00
Account Nam e: ¢ T . Sim , RECEIVABLE
Date
2007
Item
Post
Ref.
18,463.52
Acct #: 175.6
BALANCE
Debit
Credit
J9
LEDGER
856.50
6-Oct
O9.3
Item
Credit
856.50
Account Nam e: ¢ B. Pal, RECEIVABLE
Date
2007
Debit
0.00
Balance Forward
6-Oct
Credit
Post
Ref.
Acct #: 175.9
BALANCE
Debit
Credit
Debit
Credit
1,256.00
Balance Forward
J9
1,256.00
0.00
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37
Objective 9.4:
Analysis: Compute and explain
liquidity measures, the
doomsday ratio and the quick
or acid test ratio.
O9.4
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38
Objective 9.4:
Analysis: Compute and explain the doomsday
ratio and the quick or acid test ratio
Cash + cash
equivalents
Cash + Short
term
Investments +
Accounts &
Notes
Receivable
O9.4
Current
Liabilities
Doomsday
ratio
Current
Liabilities
Quick ratio
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39
Doomsday ratio
The doomsday ratio answers the following question:
If this business ceased to exist, what portion of current
liabilities could be paid by just using existing cash
available?
The doomsday ratio
deals with a worst
case scenario.
Cash
Current
Liabilities
O9.4
Doomesday
Ratio
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40
Doomsday Ratio Example
RAMOS Distributors
BALANCE SHEET
As of 12/31/07
ASSETS
Cash
Accounts Receivable
Inventory
Supplies
Current assets
Equipment
Total
25,600
56,700
98,200
2,100
182,600
121,000
486,200
LIABILITIES
Accounts Payable
Current liabilities
Notes Payable
Total
165,700
165,700
36,750
202,450
EQUITY
Owner, Capital
Total
283,750
486,200
15% of current
liabilities could be
paid with cash
available
Doomesday ratio
Dratio
O9.4
Cash / Current liabilities
0.15
.15
?
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Quick ratio
The quick ratio answers the following question:
How many dollars of cash, short term investments,
accounts and notes receivable are available to pay
current assets?
Cash + Short
term
Investments +
Accounts &
Notes
Receivable
O9.4
Notice Inventory is
not included
Current
Liabilities
Quick
Ratio
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Quick Ratio Example
BALANCE SHEET
As of 12/31/07
ASSETS
Cash
Accounts Receivable
Inventory
Supplies
Current assets
Equipment
Total
25,600
56,700
98,200
2,100
182,600
121,000
486,200
LIABILITIES
Accounts Payable
Current liabilities
Notes Payable
Total
165,700
165,700
36,750
202,450
EQUITY
Owner, Capital
Total
283,750
486,200
50% of current liabilities could be
paid without relying on Inventory
or Supplies
Quick ratio
Quick ratio =
O9.4
Cash + AR / Current Liabilities
.50
?0.50
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43
End Unit 9
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