Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Types of Receivables

Financial Accounting

7. Receivables and Investments

Types of Receivables

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Multiple Choice

Which of the following is the correct representation of the cash coverage ratio?

\text{Cash Coverage Ratio} = \frac{\text{Net Sales}}{\text{Average Accounts Receivable}}

\text{Cash Coverage Ratio} = \frac{\text{EBIT} + \text{Depreciation}}{\text{Interest Expense}}

\text{Cash Coverage Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}

\text{Cash Coverage Ratio} = \frac{\text{Net Income}}{\text{Total Assets}}

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Verified step by step guidance

Step 1: Understand the concept of the Cash Coverage Ratio. It is a financial metric used to measure a company's ability to pay its interest expenses using its cash flow. This ratio is particularly useful for creditors and investors to assess the financial health of a company.

Step 2: Identify the correct formula for the Cash Coverage Ratio. The formula is: \( \text{Cash Coverage Ratio} = \frac{\text{EBIT} + \text{Depreciation}}{\text{Interest Expense}} \). Here, EBIT stands for Earnings Before Interest and Taxes.

Step 3: Break down the components of the formula: \( \text{EBIT} \) represents the operating income before interest and taxes, \( \text{Depreciation} \) is a non-cash expense that reduces the value of assets over time, and \( \text{Interest Expense} \) is the cost incurred by a company for borrowed funds.

Step 4: Explain why this formula is correct. The Cash Coverage Ratio focuses on cash flow elements (EBIT and Depreciation) because these are the resources available to cover interest expenses. It excludes non-cash items like amortization and focuses on the company's ability to generate cash.

Step 5: Compare the incorrect options provided in the problem. For example, \( \frac{\text{Net Sales}}{\text{Average Accounts Receivable}} \) is the formula for the Accounts Receivable Turnover Ratio, not the Cash Coverage Ratio. Similarly, \( \frac{\text{Current Assets}}{\text{Current Liabilities}} \) is the Current Ratio, and \( \frac{\text{Net Income}}{\text{Total Assets}} \) is the Return on Assets Ratio.