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Chapter 8: Problem 26

During 2010, Bezel Inc. has monthly cash expenses of \(\$ 250,000\). On December 31,2010 , the cash balance is \(\$ 1,750,000\). a. Compute the ratio of cash to monthly cash expenses. b. Based on (a), what are the implications for Bezel Inc.?

Short Answer

Expert verified
The ratio of 7 means Bezel Inc. can cover 7 months of expenses with its cash reserve, indicating strong financial stability.

Step by step solution

01

Calculate the Ratio of Cash to Monthly Expenses

To find the ratio of cash to monthly expenses, divide the total cash balance by the monthly cash expenses. Use the formula: \[\text{Ratio} = \frac{\text{Cash Balance}}{\text{Monthly Cash Expenses}}\]Substitute the given values:\[\text{Ratio} = \frac{1,750,000}{250,000} = 7\]Bezel Inc. has a ratio of 7.
02

Interpret the Implications of the Ratio

The ratio of 7 indicates that Bezel Inc. has enough cash to cover 7 months of expenses without any additional income. This high ratio suggests strong liquidity, implying Bezel Inc. is in a stable financial position, and can sustain operations despite potential interruptions in cash inflows.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Liquidity Ratio
The liquidity ratio is a financial metric used to determine a company's ability to cover its short-term obligations with its current liquid assets. For Bezel Inc., the liquidity ratio is calculated by dividing the company's cash balance by its monthly cash expenses. This gives a quick snapshot of how long the company can sustain its operations without generating additional revenue.

To compute the liquidity ratio, use the formula:
  • Liqudity ratio = Cash Balance / Monthly Cash Expenses
Inserting Bezel Inc.'s figures:
  • Cash Balance = $1,750,000
  • Monthly Cash Expenses = $250,000
We find that the ratio is:
  • Liquidity ratio = $1,750,000 / $250,000 = 7
A liquidity ratio of 7 indicates that Bezel Inc. can continue its operations for 7 months without any additional income. This high liquidity is a positive financial indicator.
Financial Analysis
Financial analysis involves assessing various aspects of a company's financial health to support decision-making. It combines data from financial statements with financial ratios and metrics. In the context of Bezel Inc., the liquidity ratio provides valuable insights into its financial stability.

During the analysis, financial experts:
  • Evaluate the company's capacity to meet short-term liabilities.
  • Consider the availability of liquid assets, like cash, to ensure ongoing operations.
  • Examine potential impacts due to changes in cash flow or cost adjustments.
Bezel Inc.'s ratio of 7 implies a strong cushion against unforeseen financial disruptions. When stakeholders are informed of such a ratio, they feel more confident in the company's fiscal management and strategic planning.
Monthly Cash Expenses
Monthly cash expenses are the recurring costs a company incurs as part of its regular operations. These can include salaries, rent, utilities, and other routine expenditures essential to running a business. For Bezel Inc., the monthly cash expenses total $250,000.

Understanding monthly cash expenses is crucial because:
  • They reflect the minimum outgoing funds necessary to maintain business functions.
  • They help in forecasting budget needs and planning for future financial scenarios.
  • Insight into these expenses can assist in identifying areas for cost optimization.
By tracking monthly cash expenses, Bezel Inc. can ensure it always has enough liquidity to meet its obligations, without halting business operations. The strong liquidity ratio further signifies that the company is well-prepared to manage its regular expenses efficiently.

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Most popular questions from this chapter

Digital Com Company, a communications equipment manufacturer, recently fell victim to a fraud scheme developed by one of its employees. To understand the scheme, it is necessary to review Digital Com's procedures for the purchase of services. The purchasing agent is responsible for ordering services (such as repairs to a photocopy machine or office cleaning) after receiving a service requisition from an authorized manager. However, since no tangible goods are delivered, a receiving report is not prepared. When the Accounting Department receives an invoice billing Digital Com for a service call, the accounts payable clerk calls the manager who requested the service in order to verify that it was performed. The fraud scheme involves Matt DuBois, the manager of plant and facilities. Matt arranged for his uncle's company, Urban Industrial Supply and Service, to be placed on Digital Com's approved vendor list. Matt did not disclose the family relationship. On several occasions, Matt would submit a requisition for services to be provided by Urban Industrial Supply and Service. However, the service requested was really not needed, and it was never performed. Urban would bill Digital Com for the service and then split the cash payment with Matt. Explain what changes should be made to Digital Com's procedures for ordering and paying for services in order to prevent such occurrences in the future.

Blake Gable has recently been hired as the manager of Jittery Jim's Canyon Coffee. Jittery Jim's Canyon Coffee is a national chain of franchised coffee shops. During his first month as store manager, Blake encountered the following internal control situations: a. Blake caught an employee putting a case of 100 single-serving tea bags in her car. Not wanting to create a scene, Blake smiled and said, "I don't think you're putting those tea bags on the right shelf. Don't they belong inside the coffee shop?" The employee returned the tea bags to the stockroom. b. Jittery Jim's Canyon Coffee has one cash register. Prior to Blake's joining the coffee shop, each employee working on a shift would take a customer order, accept payment, and then prepare the order. Blake made one employee on each shift responsible for taking orders and accepting the customer's payment. Other employees prepare the orders. c. Since only one employee uses the cash register, that employee is responsible for counting the cash at the end of the shift and verifying that the cash in the drawer matches the amount of cash sales recorded by the cash register. Blake expects each cashier to balance the drawer to the penny every time-no exceptions. State whether you agree or disagree with Blake's method of handling each situation and explain your answer.

One of the largest losses in history from unauthorized securities trading involved a securities trader for the French bank, Societe Generale. The trader was able to circumvent internal controls and create over \(\$ 7\) billion in trading losses in six months. The trader apparently escaped detection by using knowledge of the bank's internal control systems learned from a previous back- office monitoring job. Much of this monitoring involved the use of software to monitor trades. In addition, traders are usually kept to tight spending limits. Apparently, these controls failed in this case. What general weaknesses in Societe Generale's internal controls contributed to the occurrence and size of the losses?

Identify each of the following reconciling items as: (a) an addition to the cash balance according to the bank statement, (b) a deduction from the cash balance according to the bank statement, (c) an addition to the cash balance according to the company's records, or (d) a deduction from the cash balance according to the company's records. (None of the transactions reported by bank debit and credit memos have been recorded by the company.) 1\. Bank service charges, \(\$ 15\). 2\. Check drawn by company for \(\$ 160\) but incorrectly recorded as \(\$ 610\). 3\. Check for \(\$ 500\) incorrectly charged by bank as \(\$ 5,000\). 4\. Check of a customer returned by bank to company because of insufficient funds, \(\$ 3,000\). 5\. Deposit in transit, \(\$ 15,500\). 6\. Outstanding checks, \(\$ 9,600\). 7\. Note collected by bank, \(\$ 10,000\).

Mattel, Inc., designs, manufactures, and markets toy products worldwide. Mattel's toys include Barbie \({ }^{\mathrm{TM}}\) fashion dolls and accessories, Hot Wheels \({ }^{\mathrm{TM}}\), and Fisher-Price brands. For a recent year, Mattel reported the following net cash flows from operating activities (in thousands): \(\begin{array}{lr}\text { First quarter ending March } 31 & \$(326,536) \\\ \text { Second quarter ending June } 30 & (165,047) \\ \text { Third quarter ending September } 30 & (9,738) \\ \text { Fourth quarter December } 31 & 1,243,603\end{array}\) Explain why Mattel reports negative net cash flows from operating activities during the first three quarters yet reports positive cash flows for the fourth quarter and net positive cash flows for the year.
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