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4. Samad established the company with authorized capital-400000 AZN. Hired personnel with total monthly salary-15000 AZN. Rented office-4000 AZN. Obtained equipment-15000 AZN. Installation request expenses-2000 AZN. Depreciation - 500 AZN per month. Taken short-term credit from bank -60000 AZN by 12% per year. Acquired goods-250000 AZN. During the month company sold 120000 AZN goods with 50% mark-up. Customers paid 70% of the price. Utility expenses -1500 AZN. Tax from sales - 4%. Required: a) Prepare Cash flow statement b) Calculate Cash Flow Coverage Ratio

Answer :

  1. The Cash Flow Coverage Ratio is approximately 68.67.
  2. Cash Flow Coverage Ratio = 68.67

Cash Flow Coverage refers to the ability of a company or individual to generate enough cash flow from operations to cover its debt service obligations. It is a financial ratio that measures the company's ability to meet its debt payments using its operating cash flow.

The Cash Flow Coverage Ratio is calculated by dividing the net cash flow from operations by the total debt service. The net cash flow from operations is the cash inflows from operating activities minus the cash outflows. The total debt service represents the total amount of debt-related payments, such as interest and principal payments, that need to be made within a specific period.

A higher Cash Flow Coverage Ratio indicates a stronger ability to generate sufficient cash flow to cover debt obligations, indicating a lower risk of default. Conversely, a lower ratio suggests a higher risk of being unable to meet debt payments.

Cash Flow Coverage is an important metric for lenders, investors, and creditors to assess the financial health and risk profile of a company. It provides insights into the company's ability to generate cash flow from its core operations and its capacity to fulfill its debt obligations

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