Chapter 12, Problem 12.8AP

(a)

To determine

Statement of cash flows

Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

Cash flows from operating activities: These refer to the cash received or cash paid in day-to-day operating activities of a company.

Direct method: This method uses the basis of cash for preparing the cash flows of statement.

Cash flows from operating activities: In this direct method, cash flow from operating activities is computed by using all cash receipts and cash payments during the year.

1. A. Cash Receipts: It encompasses all the cash receipts from sale of goods and on account receivable.
2. B. Cash Payments: It encompasses all the cash payments that are made to suppliers of goods and all expenses that are paid.

Cash flow from investing activities: This section of cash flows statement provides information concerning about the purchase and sale of capital assets by the company.

• Deduct the amount of cash used to purchase any fixed assets.
• Add the amount of cash received from sale of any fixed asset.

Cash flow from financing activities: This section of cash flows statement provides information about the cash inflow and outflow as a result of issuance and financing of debt, issue of new stock and payment of dividends.

• Add the amount of cash received from any sources of finance.
• Deduct the amount of cash used for payment for dividend and interest from financing activities.
• Deduct the amount of cash used for payment of treasury stock from financing activities.

Current cash debt coverage ratio:

It is a liquidity ratio which measures the relationship between net cash provided from operating activities and average current liabilities during the year. This ratio would be helpful in indicating the ability of the business to pay off its current liabilities from its ongoing business operations.

$\text{Current cash debt coverage ratio = }\frac{\text{Net cash provided by operating activities}}{\text{Average current liabilities}}$

Cash debt coverage ratio:

It is a solvency ratio which defines the relationship between operating cash flow to its total liabilities. This ratio would be helpful in indicating the ability of the business to pay off the total liabilities from the total business operations.

$\text{Cash debt coverage ratio = }\frac{\text{Net cash provided by operating activities}}{\text{Average total liabilities}}$

To Prepare: Statement of cash flows of K Company using direct method.

(b)

(1)

To determine

To compute: the current cash debt coverage ratio.