Question

AcelRx Pharmaceuticals develops therapies for pain relief for a variety of patients

Net cash flows $(34,456)
End of year cash and cash equivalents 60,038
Short-term investments 15,312

1. Compute the monthly cash expenses. Round to the nearest thousand
2. Compute the ratio of cash to monthly cash expenses excluding short-term investments. Round to one decimal place
3. Including short term investments as part of cash and cash equivalents compute the ratio of cash to monthly cash expenses. Round to one decimal point.
4. Comment on the results of part 2 and 3
5. AcelRx had negative cash flows from operations for the seven years, yet cash, cash equivalents and short term investments are 75,350 (60,038+15,312) how could this have happened?

Answer 1

Answer:-

1. Monthly Cash Expenses :-

Net cash Flows = $(34,456)

No of Months = 12

Monthly cash Expenses = $34,456/12 = $ 2,871.33 per Month Cash Expenses.

2. Ratio of Cash to monthly expenses excluding Short term Investements.

Answer:-

End of year cash and cash equivalents $ 60,038

Monthly Cash Expenses = $ 2,871.33

Ratio of cash to monthly cash expenses = $60,038/ 2,871.33 = 20.909

Rounded off to nearest 2 digit decimals = 20.91

3.Including short term investments as part of cash and cash equivalents compute the ratio of cash to monthly cash expenses. Round to one decimal point.

Answer :-

End of year cash and cash equivalents $ 60,038

Short term Investements = $ 15,312

Total Cash and Cash Equivalents = $60,038+ $15,312 = $75,350

Monthly Cash Expenses = $ 2,871.33

Ratio of cash to monthly cash expenses = $75,350/ 2,871.33 = 26.242

Rounded off to nearest 2 digit decimals = 26.24

4) Comment on the results of part 2 and 3

Answer:-

A cash ratio that is especially useful for startup companies or companies in financial distress is this. (=Cash as of Year End/Monthly Cash Expenses)

that simple Baisc defence interval ratio

no of months company can have its daily operation expenses meet without any outside support.

in case 2.

company can run only for 20.91 months with this much of available funds.

but in case 3,

company can run for 26 months with this much of avialable funds.

5.AcelRx had negative cash flows from operations for the seven years, yet cash, cash equivalents and short term investments are 75,350 (60,038+15,312) how could this have happened?

Answer:-

This situation may seem a bit counter-intuitive at first, but it is actually quite common and not too difficult to understand.

Let's take a closer look at the different types of expenses a company can incur. A typical income statement will include expenses such as depreciation, the use of prepaid expenses, or losses recorded on paper for bad debt expenses.

Lets Take an Example :-

Now, let's say company XYZ had a net loss of $200,000 for the current year.

Suppose the company recorded $200,000 in depreciation for the year, used up $100,000 of prepaid expenses (such as insurance premiums) and wrote off $150,000 of bad debts it knew it could never collect. The total value of XYZ's non-cash charges was $450,000,

which means its actual cash flow for the year was $450,000 greater than its net income as reported on its income statement. Thus, it actually had a positive cash flow of $250,000 (-$200,000 + $450,000) for the year.