The following information from the Statement of Cash Flows of Dome Ltd. as of December 31, 2020 is available:
Net cash used by investing activities.......... (65,000)
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
Purchase of land......................................... (27,000)
Purchase of buildings and equipment..... (52,000)
Sale of equipment……… 14,000
Payment of cash dividend......................... (25,000)
Sale of bonds............................................ 45,000
The following information from the Statement of Financial Position of Dome Ltd. as of December 31, 2020 is available:
Assets:
Cash $ 44,000
Accounts receivable 39,000
Buildings and equipment.... 154,000
Accumulated depreciation—
buildings and equipment (46,000)
Patents 24,000
Total Assets $215,000
Liabilities & Shareholders’ Equity
Accounts payable $ 28,000
Bonds payable 54,000
Common shares 69,000
Retained earnings 64,000
Total Liabilities & Shareholders’ Equity $215,000
At the beginning of 2020, the accounts payable balance was $21,000, and the bonds payable balance was $9,000. All of Dome’s bonds have been issued at par.
Instructions (Show all supporting calculations & formula)
Based on the above information calculate the following for Dome Ltd for 2020:
a. Net cash provided by operating activities
b. Current cash debt coverage ratio
c. Cash debt coverage ratio
d. Free cash flow
e. Based on the above analysis, comment on the company's liquidity and financial flexibility.
a)
Net increase in cash = Net cash provided by operating activities + Net cash used by investing activities + Net cash provided by financing activities
11000 = Net cash provided by operating activities -65000 + 20000
Net cash provided by operating activities = 56000
b)
Current cash debt coverage ratio = Net cash provided by operating activities / average current liabilities
current liabilities in the balance sheet are accounts payable
averge current liabilities = (current liabilities at beginning of year + current liabilities at end of year)/2
averge current liabilities = (21000 + 28000)/2
averge current liabilities = 24500
Current cash debt coverage ratio = 56000/24500 = 2.29
c)
cash debt coverage ratio = Net cash provided by operating activities / average total liabilities
total liabilities = bonds payable + accounts payable
averge total liabilities = (total liabilities at beginning of year + total liabilities at end of year)/2
averge total liabilities = (21000 +9000 + 54000+ 28000)/2
averge total liabilities = 56000
cash debt coverage ratio = 56000/56000 = 1
d)
Free cash flow = Net cash provided by operating activities - Capital expenditure
Free cash flow = 56000 - ( 52000 + 27000)
Free cash flow = -23000
e)
Current Cash debt coverage ratio indicates the ability of the business to pay its current liabilities from its operations. A high ratio of 2.29 signifies that the company has a good liquidity position as it can easily pay off all the short term obligations easily.
Cash debt coverage ratio shows how much of the company's total liabilities can be covered (paid) with net cash from operating activities. A ratio of 1 signifies that a company can immediately pay off all their total liabilities if needed only with their operating income.
Free cash flow is the cash left over after a company pays for its operating expenses and capital expenditures. A negative free cash flow signifies that although a company has strong liquidity ( as proven from the two ratios above) it lacks financial flexibility because of a negative amount.
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