A company with operating income of $200,000, cash flow from operating activities of $75,000 and gross profit of $380,000, has interest payments of $25,000. What is the company's interest coverage ratio (cash basis)?

Question

Quizplus · Accepted Answer

The interest coverage ratio is a financial metric used to determine how easily a company can pay interest on its outstanding debt. The interest coverage ratio can be calculated on an accrual basis using operating income or on a cash basis using cash flow from operating activities.
To calculate the interest coverage ratio on a cash basis, you would use the following formula:
Interest Coverage Ratio (Cash Basis) = Cash Flow from Operating Activities / Interest Payments
Given the information:
Cash Flow from Operating Activities = $75,000
Interest Payments = $25,000
Now, we can calculate the interest coverage ratio (cash basis):
Interest Coverage Ratio (Cash Basis) = $75,000 / $25,000
Interest Coverage Ratio (Cash Basis) = 3
So, the company's interest coverage ratio on a cash basis is 3, or 3 to 1. This means that the company generates $3 in cash from operating activities for every $1 of interest expense it must pay.
The correct answer is:
b. 3 or 3 to 1

A Company with Operating Income of $200,000, Cash Flow from Operating