CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

As an analyst, you are concerned about whether Arcadian Manufacturing Co. can generate a stream of inflows sufficient to pay interest expenses. In the last three quarters, Arcadian's operating cash flows have been decreasing but its operating profits have been increasing. Which one of the following ratios is the best one to use in this situation?
A. Days receivables outstanding
B. Interest coverage ratio
C. Cash flow coverage ratio
Explanation: The cash flow coverage ratio (operating cash flows before interest and tax payments/interest paid) discloses whether operating cash flows will be sufficient to pay interest on debt. Since the operating cash flows are decreasing, this ratio provides a more conservative result and is more appropriate to use than accrual-based operating profit.

User Contributed Comments 8

User Comment
Gina and what is the difference to interest coverage ratio?
cbb1 Interest coverage ratio is op. profit/interst, while cash flow coverage ratio is CFO/interest. Thus, cash flow coverage ratio is the best one given the situation.
danlan Good comments, cbb1
Shelton CONSERVATIVE
serboc I used schweser to learn the mtrl but this website is good for the practice tests & questions for the price
thecfaguy I totally agree with serboc on that.... :)
assiduous Not so sure about the explanation for this one. If operating cash flow has been decreasing but operating profits have been increasing this could be a sign that more sales have been made on credit (which would delay cash generation). While cash flow coverage would be useful I would say days receivables outstanding would be just as helpful. As an analyst, I would definitely be doing a forward looking analysis which is why days receivables outstanding seems just as important here.
dbalakos Concerned about whether Arcadia can generate a STREAM OF INFLOWS, we have to read the questions more carefully!!
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