Certified Management Accountant 2025 – 400 Free Practice Questions to Pass the Exam

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How does cash decrease affect the cash ratio?

The ratio increases

The ratio remains unaffected

The ratio decreases

The cash ratio is a liquidity measure that assesses a company’s ability to cover its current liabilities with its cash and cash equivalents. It is calculated by dividing cash and cash equivalents by current liabilities.

When cash decreases, the numerator in the cash ratio calculation (cash and cash equivalents) decreases, while the denominator (current liabilities) remains unchanged unless there are specific adjustments or changes in liabilities. Since the cash amount is reduced without any corresponding change in current liabilities, the overall ratio becomes smaller.

Thus, a decrease in cash directly leads to a lower cash ratio, indicating that the company's ability to meet its short-term obligations with its available cash has diminished. This is particularly significant in assessing the company's liquidity position, as a lower ratio suggests increased financial risk.

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The ratio fluctuates according to current liabilities

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