liquidity ratio revealing the ability of the business to meet its current debts. It indicates the period of time the entity can operate on its current liquid assets without needing revenues from next period’s sources. The ratio equals defensive assets (cash, marketable securities, and receivables) divided by projected daily operational expenditures less noncash charges. Projected daily operational expenditures are determined by dividing cost of goods sold plus operating expenses and other ordinary cash expenses by 360. Assume cash of $30,000, marketable securities of $38,000, receivables of $46,000, projected daily expenditures of $450,000, and noncash charges of $20,000. The ratio equals:
ratio showing how long a company can operate on its current liquid assets without having to rely on additional revenues. The ratio divides cash and equivalents, marketable securities, and accounts receivable (defensive assets) by projected daily operating expenses less noncash charges. The denominator is determined by dividing cost of goods sold plus operating expenses and other ordinary cash expenses by 360.