AFM291 Chapter Notes - Chapter 5: Debt Service Coverage Ratio, Cash Flow, Air Canada
Document Summary
For analyzing company"s liquidity, solvency and financial flexibility. Current ratio, quick or acid test ration and current cash debt coverage ratio help to measure liquidity. Liquidity of assets such as inventory is assessed with the turnover ratio. Solvency refers to the enterprise"s ability to pay its debt and related interest. Liquidity and solvency affect the entity"s financial flexibility -> ability of enterprise to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities. Air canada eased its cash flow problems through: (1) arranging for interim financing (2) restructuring union contracts (3) renegotiating aircraft leases for 106 planes. Recognized liabilities -> worsen liability and solvency ratios -> biased to capitalize instead of expensed. Human capital not included and internally generated assets, research. Different function -> recorded as separate items. Attributes that allow them to be measured or valued more easily. Liabilities with different implications for the enterprise"s financial flexibility.