Accounting: Tools for Business Decision Making, 5th Edition

Published by Wiley
ISBN 10: 1118128168
ISBN 13: 978-1-11812-816-9

Chapter 12 - Statement of Cash Flows - Brief Exercises: BE12-10

Answer

Step1: Calculation of free cash flows: Cash provided by operations is 405,000 dollars, Capital expenditures are 200,000 dollars, Cash dividends are 0 dollars. By substituting these values in the cash flow formula: Free cash flow = 405,000 - 200,000-0 = -205,000. Free cash flows = 205,000 dollars Step2: Calculation of current cash to debt coverage ratio: Cash provided by operations is 408,000 dollars Average current liabilities are 150,000 dollars. By substituting these values in the current cash to debt coverage ratio: Cash to debt coverage ratio = 405,000/150,000 = 2.7:1 Current Cash to debt coverage ratio is = 2.7:1 Step3: Calculation of cash debt coverage ratio: Cash provided by operations is 405,000 dollars, Average current liabilities are 225,000 dollars. By substituting these values in the above formula, we get the cash debt coverage ratio: Cash debt coverage ratio =405,000/225,000 = 0.14: 1 Cash debt coverage ratio = 0.14:1

Work Step by Step

Step1: Formula for free cash flow is as below: Free cash flow = Cash provided by operations - Capital expenditure - Cash dividends Step2: Formula for cash to debt coverage ratio is as below: Current Cash to debt coverage ratio = Cash provided by operations/Average current liabilities Step3: Formula for cash debt coverage ratio is as below: Cash debt coverage ratio = Cash provided by operations/Average current liabilities
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