For Year Ended
December 31, 2014
Cash on December 31, 2014 $ 69,350
Cash flow from operations (114,000)
a. Compute the ratio of cash to monthly cash expenses.
b. Interpret the results computed in (a).
Answer:
Negative Cash Flow from Operations
a. Monthly Cash Expenses =
= $114,000 = 12 months
12 months
$9,500 per month
Ratio of Cash to
=
Monthly Cash Expenses
Cash as of Year-End
Monthly Cash Expenses
$69,350 = = $9,500 per month
7.3 months
b. The preceding computations indicate that Otto Company has 7.3 months of cash remaining as of December 31, 2014. Otto Company will need to generate positive cash flow from operations or raise additional financing from its owners or by issuing debt.