Posted: July 19th, 2016

Would you feel comfortable making a loan based on the ratio you computed in (1)?

On its most recent statement of cash flows, a company reported net cash provided by operating activities of $12 million. Its capital expenditures for the same year were $2 million. A note to the financial statements indicated that the total amount of debt that would mature over the next five years was $20 million.

1. Compute the company’s cash flow adequacy ratio.
2. If you were a banker considering loaning money to this company, why would you be interested in knowing its cash flow adequacy ratio? Would you feel comfortable making a loan based on the ratio you computed in (1)? Explain your answer.

EXERCISE 12-20: Classification of Activities

Use the following legend to indicate how each transaction would be reported on the statement of cash flows. (Assume that the stocks and bonds of other companies are classified as long-term investments.)
II = Inflow from investing activities
OI = Outflow from investing activities
IF = Inflow from financing activities
OF = Outflow from financing activities
CE = Classified as a cash equivalent and included with cash for purposes of preparing the statement of cash flows

1. Purchased a six-month certificate of deposit
2. Purchased a 60-day Treasury bill
3. Issued 1,000 shares of common stock
4. Purchased 1,000 shares of stock in another company
5. Purchased 1,000 shares of its own stock to be held in the treasury
6. Invested $1,000 in a money market fund
7. Sold 500 shares of stock to another company
8. Purchased 20-year bonds of another company
9. Issued 30-year bonds
10. Repaid a six-month bank loan

PROBLEM 13-6: Liquidity Analyses for Coca-Cola and Pepsi

The following information was summarized from the balance sheets of the Coca-Cola Company and Subsidiaries at December 31, 2010, and PepsiCo Inc. and Subsidiaries at December 25, 2010:
(in millions) Coca-Cola PepsiCo
Cash and cash equivalents $8,517 $5,943
Short-term investments 2,682 426
Marketable securities 138 –
Accounts and notes receivables, net* 4,430 6,323