U1, AOS 2: Cash Flow Cover (CFC) Flashcards
What is Cash Flow Cover?
Cash Flow Cover measures a company’s ability to meet its short-term liabilities using its operating cash flow.
How is Cash Flow Cover calculated?
Cash Flow Cover is calculated by dividing Operating Cash Flow by Total Liabilities.
What does a Cash Flow Cover ratio of less than 1 indicate?
A ratio of less than 1 indicates that a company’s operating cash flow is insufficient to cover its short-term liabilities.
Why is Cash Flow Cover important for businesses?
Cash Flow Cover is important as it indicates the financial health and liquidity of a company. It shows whether a company can meet its short-term obligations with its available cash flow.
How can a company improve its Cash Flow Cover ratio?
A company can improve its Cash Flow Cover ratio by increasing its operating cash flow or by decreasing its total liabilities.
Calculate the Cash Flow Cover ratio for a company with Operating Cash Flow of $500,000 and Total Liabilities of $400,000.
Cash Flow Cover = Operating Cash Flow / Total Liabilities
Cash Flow Cover = $500,000 / $400,000 = 1.25
T/f - A Cash Flow Cover ratio of 0.8 indicates that a company’s operating cash flow exceeds its total liabilities.
False
T/f - A higher Cash Flow Cover ratio indicates better liquidity for a company.
True
Which of the following ratios does not measure liquidity?
a) Current Ratio
b) Quick Ratio
c) Debt Ratio
d) Cash Flow Cover
c) Debt Ratio
What does a Cash Flow Cover ratio of 1.5 signify?
A Cash Flow Cover ratio of 1.5 indicates that a company’s operating cash flow is 1.5 times its total liabilities, suggesting good liquidity.
How does a decrease in operating cash flow affect Cash Flow Cover?
A decrease in operating cash flow decreases the Cash Flow Cover ratio, making it more difficult for a company to cover its short-term liabilities.
Why might a company with a low Cash Flow Cover ratio face financial difficulties?
A company with a low Cash Flow Cover ratio may struggle to pay its short-term debts, leading to liquidity problems and potential insolvency.
Can a business have a negative Cash Flow Cover ratio?
Yes, if a business’ operating cash flow is negative or insufficient to cover its total liabilities, it can have a negative Cash Flow Cover ratio.
How does a high Cash Flow Cover ratio benefit a business?
A high Cash Flow Cover ratio indicates that a business has ample cash flow to cover its short-term liabilities, providing financial stability and flexibility.
Is Cash Flow Cover an indicator of long-term profitability?
No, Cash Flow Cover primarily assesses a company’s short-term liquidity and its ability to meet immediate financial obligations. It does not directly reflect long-term profitability.
