Dictionary of Accounting Terms: funds-flow-fixed-charge coverage
funds-flow-fixed-charge coverage
ratio of funds provided by operations plus fixed charges to fixed charges. This ratio indicates whether a company can satisfy its annual fixed charges from funds flow. Fixed charges remain constant under varying rates of production and are often contractual. Examples of fixed charges are rent, lease payments, insurance, and interest. Funds flow can be expressed as working capital from operations or cash flow from operations. Assume funds provided by operations before tax is $2,000,000, which includes a deduction of fixed charges for $300,000. The ratio is thus $2,300,000 divided by $300,000, or 7.67.
