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Ratio analysis

10-38. Below is Steve Frim Company's statement of cash flows for the year ended December 31,2005:

Steve Frim Company
Statement of Cash Flows
For the Year Ended December 31, 2005
(in thousands)

Cash Flows from Operating Activities: $389

Net income Adjustments to reconcile net income
to net cash provided by opening activities:
Depreciation expense $131
Increase in accounts receivable (287)
Increase in merchandise inventory (104)
Increase in prepaid expense (70)
Decrease in accounts payable (4) (334)

Cash Flows from Investing Activities: $(1,255)
Purchase of building (304)
Net cash used by operating activities (1,559)

Cash Flows from Financing Activities:
Proceeds from long-term loan $800
Proceeds from sale of common stock 300
Payment of cash dividends (100)
Net cash provided by financing activities $1,000
Net decrease in cash during 2005 $(504)
Cash balance, January 1, 2005 1, 200
Cash balance, December 31, 2005 $ 696


Assume that average current liabilities total $338,000 and average total liabilities total $1,180,000.

a. Calculate operating cash flow to current debt ratio.
b. Calculate the opening cash flow coverage ratio.

Solution Preview

Operating cash flow to current debt:

Net Cash Flow From Operations / Average Current Liabilities

= $55000/338000= 55/338 or .16

The purpose of this ratio is to evaluate the abilities of the company to repay its current ...

Solution Summary

Steve Frim Company Statement of Cash Flows: Calculate operating cash flow to current debt ratio and coverage ratio