Question

Question 4.2 (Total: 12 marks; 4 marks each)

Financial statements for Space Galaxy Ltd. are presented below:

Space Galaxy Ltd.

Statement of Financial Position

December 31, 2020

Assets Liabilities & Shareholders’ Equity

Cash $44,000 Accounts payable $28,000

Accounts receivable 39,000 Bonds payable 54,000

Buildings and equipment 154,000

Accumulated depreciation—

buildings and equipment (46,000) Common shares 69,000

Patents 24,000 Retained earnings 64,000

$215,000 $215,000

Space Galaxy Ltd.

Statement of Cash Flows

For the Year Ended December 31, 2020

Cash flows from operating activities

Net income $60,000

Adjustments to reconcile net income to net cash

provided by operating activities:

Increase in accounts receivable $(19,000)

Increase in accounts payable 7,000

Depreciation—buildings and equipment 12,000

Gain on sale of equipment (7,000)

Amortization of patents 3,000 (4,000)

Net cash provided by operating activities 56,000

Cash flows from investing activities

Sale of equipment 14,000

Purchase of land (27,000)

Purchase of buildings and equipment (52,000)

Net cash used by investing activities (65,000)

Cash flows from financing activities

Payment of cash dividend (25,000)

Sale of bonds 45,000

Net cash provided by financing activities 20,000

Net increase in cash 11,000

Cash, January 1, 2020 33,000

Cash, December 31, 2020 $44,000

At the beginning of 2020, the accounts payable balance was $21,000, and the bonds payable balance was $9,000. All of Space Galaxy’s bonds have been issued at par.

Required

1. Calculate the current cash debt coverage ratio

2. Calculate the cash debt coverage ratio

3. Calculate the free cash flow

Answer 1

1)

Current Cash Debt Coverage Ratio = Net cash provided by operating activities/ Average current liabilities

                                                              =$56,000 / (($21,000 + $28,000)/2)

                                                             =$56,000 / $24,500

Current Cash Debt Coverage Ratio = $2.29 : 1

2)

Cash debt coverage ratio = Net cash provided by operating activities/ Average total liabilities

                                         =$56,000 / $56,000

Cash debt coverage ratio = 1 : 1

Note :

Average total liabilities = [(21,000+9,000)+(28,000+54,000)]/2

                                      =$112,000/2

Average total liabilities =$56,000

3)

Free Cash Flow = operating cash flow - Capital expenditure

                           =$56,000 - $65,000

Free Cash Flow =($9,000)

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