Repayment capacity is best measured by which financial statement?

Repayment capacity is best measured by which financial statement?

• A. Projected cash flow statement
• B. Income statement
• C. Balance sheet
• D. Statement of owner’s equity

Answer: (A)

The ability to repay debts relies on actual cash arriving and leaving the business over time, not just profits on paper. A projected cash flow statement best captures repayment capacity because it lays out expected cash receipts and cash payments, including debt service, for future periods. This shows whether there will be enough cash to meet obligations when they come due, even if the business is profitable on an accrual basis. The income statement focuses on profitability—revenues minus expenses—over a period and includes non-cash items like depreciation, so it doesn’t reveal timing or sufficiency of cash available for debt payments. The balance sheet is a snapshot of what the business owns and owes at a single point in time, which helps gauge solvency but not the flow of cash to service debt. The statement of owner’s equity tracks changes in owners’ investment and retained earnings, not debt repayment capacity. So, for assessing whether the business can meet its loan obligations as they come due, the projected cash flow statement provides the most direct and relevant information.

The ability to repay debts relies on actual cash arriving and leaving the business over time, not just profits on paper. A projected cash flow statement best captures repayment capacity because it lays out expected cash receipts and cash payments, including debt service, for future periods. This shows whether there will be enough cash to meet obligations when they come due, even if the business is profitable on an accrual basis.

The income statement focuses on profitability—revenues minus expenses—over a period and includes non-cash items like depreciation, so it doesn’t reveal timing or sufficiency of cash available for debt payments. The balance sheet is a snapshot of what the business owns and owes at a single point in time, which helps gauge solvency but not the flow of cash to service debt. The statement of owner’s equity tracks changes in owners’ investment and retained earnings, not debt repayment capacity.

So, for assessing whether the business can meet its loan obligations as they come due, the projected cash flow statement provides the most direct and relevant information.