Question

Financial statements for Space Galaxy Ltd. are presented below:

Space Galaxy Ltd.

Statement of Financial Position

December 31, 2018

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, 2018

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, 2018                                                                         33,000

Cash, December 31, 2018                                                                 $ 44,000

At the beginning of 2018, 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

Computation of Current Cash Debt Coverage Ratio
Net Cash provided by operating Activities (a)	$56,000.00
Average Current Liabilities (b) ($28000+$28000-7000)/2	$24,500.00
Current Cash Debt Coverage Ratio (a/b)	2.29

Computation of Cash Debt Coverage Ratio
Net Cash provided by operating Activities (a)	$56,000.00
Average Total Liabilities (b) ( 28000+54000+28000+54000-7000-45000)/2	$56,000.00
Cash Debt Coverage Ratio (a/b)	1

Computation of Free Cash Flow
Operating Cash Flow (a)	$56,000.00
Capital Expenditure (b)	-$65,000.00
Free Cash Flow (a-b)	$121,000.00