Chapter 5: Q26Q. (page 238)

Sergey Co. has net cash provided by operating activities of $1,200,000. Its average current liabilities for the period are $1,000,000, and its average total liabilities are $1,500,000. Comment on the company’s liquidity and financial flexibility, given this information.

Short Answer

Expert verified

The business reflects agood position in terms of financial flexibility and liquidity.

Step by step solution

Definition of Financial Flexibility

The ability of the business entity to handle the financial pressure that might arise in different economic conditions is known as financial flexibility.

Liquidity of the Business

$\begin{array}{rcl} Current cash debt coverage & = & \frac{Net cash provided by operating activities}{Average current liabilities} \\ = & \frac{$ 1, 200, 000}{$ 1, 000, 000} \\ = & 1.20 \end{array}$

Conclusion: Current cash debt coverage is 1.20, which means that a business entity can cover all of its current liabilities using the cash generated from operations.

Financial Flexibility of the Business

$\begin{array}{rcl} Cash debt coverage & = & \frac{Net cash provided by operating activities}{Average total liabilities} \\ = & \frac{$ 1, 200, 000}{$ 1, 500, 000} \\ = & 0.80 \end{array}$

Conclusion: Cash debt coverage is 0.80, reflecting that the business entity can cover at least 80% of its total liabilities using the cash generated from operations.

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UHURA Company
Balance Sheet
For the year ended 2017
Current assets
Cash	\(230,000
Accounts receivables (Net)	340,000
Inventory (Lower of average cost or market)	401,000
Equity investment (Trading)	140,000

Property, Plant and Equipment
Building (net)	570,000
Equipment (net)	160,000
Land held for future use	175,000

Intangible assets
Goodwill	80,000
Cash surrender value of life insurance	90,000
Prepaid expenses	12,000

Current liabilities
Account payable	135,000
Note payable	125,000
Pension obligation	82,000
Rent payable	49,000
Premium on bond payable	53,000
Long-term Liabilities
Bond payable	500,000
Stockholders equity
Common stock \)1 par, authorized 400,000 shares, issued 290,000	290,000
Additional paid in capital	160,000
Retained earnings

Particular	Debit	Credit
Cash	\(?
Supplies	1,200
Prepaid insurance	1,000
Equipment	48,000
Accumulated depreciation – Equipment		\)4,000
Trademarks	950
Accounts payable		10,000
Salaries and wages payable		500
Unearned service revenue		2,000
Bonds payable (due 2024)		9,000
Common stock		10,000
Retained earnings		25,000
Service revenue		10,000
Salaries and wages expenses	9,000
Insurance expenses	1,400
Rent expenses	1,200
Interest expenses	900
Total	\(?	\)?

Sergey Co. has net cash provided by operating activities of \(1,200,000. Its average current liabilities for the period are \)1,000,000, and its average total liabilities are $1,500,000. Comment on the company’s liquidity and financial flexibility, given this information.

Short Answer

Step by step solution

Definition of Financial Flexibility

Liquidity of the Business

Financial Flexibility of the Business

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