If you want to know whether a company can pay its current liabilities, you need to look at a special ratio called its current cash debt coverage. The following practice questions ask you to calculate this ratio for two different companies.

Practice questions

  1. Trendy Royal Coaches has these comparative balance sheets:


    From the statement of cash flows, cash provided by operating activities was $350 in 2015 and $270 in 2014. Calculate current cash debt coverage for 2015.

  2. Closet Queen Organizers has the following financial statements:


    Selected information from the 2015 financial statements:

    • Interest expense: $8

    • Tax expense: $10

    • Net income: $20

    • Cash dividends paid: $164

    • Capital expenditures: $310

    • Net cash provided by operating activities: $35

    Calculate cash debt coverage for 2015 and interpret the ratio as compared to a competitor's ratio of .17.

Answers and explanations

  1. 6.36

    Current cash debt coverage assesses the ability of the company to pay its current liabilities. The formula is cash provided by operating activities divided by average current liabilities.

  2. .099; a lower cash debt coverage ratio indicates a company with a weaker solvency position

    You calculate cash debt coverage by dividing net cash from operating activities by average total liabilities.


    Closet Queen Organizers has a lower cash debt coverage ratio than its competitor, which suggests weaker solvency.

If you need more practice on this and other topics from your accounting course, visit Dummies.com to purchase Accounting For Dummies! Featuring the latest information on accounting methods and standards, the information in Accounting For Dummies is valuable for anyone studying or working in the fields of accounting or finance.

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Lisa Zimmer Hatch, MA, and Scott A. Hatch, JD, have been helping students excel on standardized tests and navigate the college admissions process since 1987. They have written curricula and taught students internationally through live lectures, online forums, DVDs, and independent study.

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