For the below, I’m confused how was the CFO calculated to be 700,000? There’s a step in the calculation that I’m missing??”
SUL Company’s cash balance increased by $400,000 during the current period. In examining the statement of cash flow, you see that the net cash flow from investing was ($2.3 million) and the net cash flow from financing was $2 million. Further investigation reveals that the firm has fixed charges of $600,000, interest expenses of $525,000, and taxes of $120,000.
What is the cash flow to fixed charges ratio?
B. 1.24 (Correct Answer)
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LOS: Identify the major components and classifications of each statement.
Net Cash Flow = Cash Flow from Operations + Cash Flow from Investing + Cash Flow from Financing.
Here’s the formula:
|Cash flow from Operating Activities||xxx|
|Cash flow from Investing Activities||xxx|
|Cash flow from Financing Activities||xxx|
|Increase (Decrease) in Cash||xxx|
If we squeeze the formula above, we will arrive at the CFO of:
|Increase (Decrease) in Cash||400,000|
|Less: Cash flow from Financing Activities||(2,000,000)||Deducted – net cash inflow|
|Less: Cash flow from Investing Activities||2,300,000||Added – net cash outflow|
|Cash flow from Operating Activities (CFO)||700,000|
Therefore, the Cash Flow to Fixed Charges ratio will be:
Cash Flow to Fixed Charges = (Operating Cash Flow + Fixed Charges + Tax Payments)
Cash Flow to Fixed Charges = ($700,000 + $600,000 + $120,000) / $600,000
Cash Flow to Fixed Charges = $1,420,000 / $600,000
Cash Flow to Fixed Charges = 2.37
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