"Financial Report":Understanding Income Statements

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Questions 1:

Which of the following statements about cash flow ratios is most valid?

A 、Reinvestment ratio measures a firm’s ability to acquire assets with investing cash flows.

B、Debt payment ratio measures a firm’s ability to pay debts with operating cash flows.

C、 Interest coverage ratio is calculated as operating cash flow divided by interest payments.

Questions 2:

The following data are available on a company for the current year:

Financial Report:Understanding Income Statements

The company will most likely report other comprehensive income (OCI) (in £ thousands) as a:

A 、loss of 55,000.

B 、gain of 186,000.

C、 gain of 301,000.

View answer resolution

【Answer to question 1】B

【analysis】

B is correct. Debt payment ratio (Cash flow from operations/Cash paid for long-term debt repayment) shows the firm’s ability to pay debts with operating cash flows. C is incorrect. Interest coverage ratio is calculated as (CFO + Interest paid + Taxes paid)/Interest paid. It measures the firm’s ability to meet interest obligations. A is incorrect. Reinvestment ratio (CFO/Cash paid for long-term assets) shows the firm’s ability to acquire assets with operating cash flows.

【Answer to question 2】A

【analysis】

A is correct.

Financial Report:Understanding Income Statements