Presented below is a condensed version of comparative balance sheets partial for Orozco Corporation’s for the...
Presented below is a condensed version of comparative balance sheets partial for Orozco Corporation’s for the last two years at December 31.
|
2019 |
2018 |
|
|
Assets |
||
|
Equipment |
$260,000 |
$200,000 |
|
Liabilities |
||
|
Accounts payable |
34,000 |
47,000 |
|
Bonds payable |
150,000 |
200,000 |
Additional information:
- Net cash provided by operating activities for 2019 was $132,000
- Cash dividends of $60,000 were declared and paid.
- Bonds payable amounting to $50,000 were retired through issuance of common stock.
- Net income for 2019 was $125,000
Instruction
Determine Orozco Corporation’s current cash debt coverage ratio, cash debt coverage ratio, and free cash flow. Comment on its liquidity and financial flexibility.
Homework Answers
Ans:
(a) Current Cash Debt Coverage Ratio = Cash flow from operating activities / Average Current liabilities
= $132000 / $40500
Current Cash Debt Coverage Ratio= 3.2592 or 3.26
Working:
Average Current Liabilities = ($34000 + $47000) / 2
= $40500
(b) Cash Debt Coverage Ratio = Cash flow from operating activities / Average Total liabilities
= $132000 / $215500
Cash Debt Coverage Ratio = 0.6125 or 0.613
Working:
Average Total Liabilities = ($34000 + $47000 + $150000 + $200000) / 2
= $215500
(c) Free Cash Flow = Cash flow from operating activities - Capital expenditure
= $132000 - $60000
Free Cash Flow = $72000
Working:
Capital expenditure-
Purchase of Equipment = Equipment in 2019 - Equipement in 2018 = $260000-$200000=$60000
(d) Comment on Orozco Corporation’s Liquidity and Financial Liability- Company's Cash Debt coverage ratio is 0.613 which is sufficient for covering portion of its total liabilities. Company have enough cash flow from operating activities to manage its liabilities. The company is financially sound and is able to raise funds through issue of debt and equity.
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Presented below is a condensed version of comparative balance
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