Question

Analyzing Cash Flow Ratios Pearce Enterprises reported the following information for the past

year of operations:

Transaction

Free

Cash Flow

$250,000

Operating-Cash-

Flow-to-Current-

Liabilities Ratio

1.0 times

Operating-Cash-

Flow-to-Capital-

Expenditures

Ratio

3.0 times

a.

Recorded credit sales of $9,000

b.

Collected $4,000 owed from customers

c.

Purchased $28,000 of equipment on

long-term credit

d.

Purchased $16,000 of equipment for

cash

e.

Paid $10,000 of wages with cash

f.

Recorded utility bill of $1,750 that has

not been paid

For each transaction, indicate whether the ratio will (I) increase, (D) decrease, or (N) have no effect.

Answer 1

a)	Recorded credit sales of $ 9,000
	Credit sales will not effect on operating cash flow to current liabilities ratio as well as operating cash flow to capital expenditure ratio since it is non cash transaction.
b)	Collected $ 4,000 owed from customers
	Collection from customers shall increase Operating cash flow to current liabilities ratio as well as operating cash flow to capital expenditure ratio since it will increase operating cash flow.
c)	Purchased $ 28,000 of equipment on long term credit.
	This transaction is related to investing activities. Therefore there will be no effect on Operating cash flow to current liabilities ratio. Also there will be no effect on operating cash flow to capital expenditure ratio since it is credit transaction and it does not involve cash outflow or cash inflow.
d)	Purchased $16,000 of equipment for cash
	This transaction is related to investing activities involving cash outflow. Therefore there will be decrease in operating cash flow to capital expenditure ratio because capital expenditure is increasing. There will be no effect on operating cash flow to current liabilities ratio.
e)	Paid $ 10,000 of wages with cash
	This transaction is related to operating activities and involving cash outflow. Operating cash flow shall be decreased by $ 10,000 therefore operating cash flow to current liabilities ratio and operating cash flow to capital expenditure will be decreased.
f)	Recorded utility bill of $ 1,750 that has not been paid
	This transaction is related to operating activity but this is non cash nature transaction. In this transaction current liability shall be increased by $ 1,750 resulting in decrease in Operating cash flow to current liability ratio. No effect on operating cash flow to capital expenditure ratio