Question

Compute two cash flow ratios.

Answer 1

Answer:-

Cash flow ratios such as the quick ratio, the current ratio and the operating cash flow ratio

Quick ratio:-

The quick ratio is a measure of how well a company can meet its short-term financial liabilities. Also known as the acid-test ratio, it can be calculated as follows: (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities..

Let Us say Current Liabilities = $ 200,000

Current Assets = $300,000

Stock ( Inventory) = $50,000

Prepaid Expenses = $50,000

Quick ratio = (current assets – inventories- prepaid expenses) / current liabilities,

Quick ratio = ( 300,000-50,000-50,000) / 200,000 = 1

The quick ratio measures the dollar amount of liquid assets available for each dollar of current liabilities. Thus, a quick ratio of 1 means that a company has $1.00 of liquid assets available to cover each $1 of current liabilities.

2.Operating cash flow ratio :

The operating cash flow ratio is a measure of how well current liabilities are covered by the cash flow generated from a company's operations.

The operating cash flow ratio can gauge a company's liquidity in the short term. Using cash flow as opposed to income is considered a cleaner, or more accurate, measure since earnings can be manipulated

Operating Cash Flow Ratio = Cash flow from Operations / Current Liabilites

the calculation of the operating cash flow ratio first calls for the derivation of cash flow from operations, which requires the following calculation:

+ Income from operations
+ Non-cash expenses
- Non-cash revenue
= Cash flow from operations

An example of non-cash revenue is deferred revenue that is being recognized over time, such as an advance payment on services that will be provided over several months.

Example:-

If the company has $900,000 in cash flow from operations as well as $150,000 in current liabilities, the operating cash flow ratio is ($900,000 divided by $150,000) equals 6.0 times

The operating cash flow ratio is a measure of a company's liquidity. If the operating cash flow is less than 1, the company has generated less cash in the period than it needs to pay off its short-term liabilities. ... Thus, investors and analysts typically prefer higher operating cash flow ratios