Certified Government Financial Manager (CGFM) Practice Exam 2026 – Your All-in-One Guide to Exam Success!

The measurement of the ability to repay debt is best represented by the formula that takes into account both excess revenues over operating expenditures and how those funds relate to principal payments and interest expenses. This approach provides a direct assessment of the available cash flow that can be allocated to debt service.

When calculating this ratio, it reflects the organization's operational efficiency and financial health by highlighting how much surplus is generated from core operations after covering operating costs. The surplus can then be used to service debt obligations, making it a strong indicator of financial stability. It essentially demonstrates whether the organization can comfortably meet its debt obligations without compromising necessary operating expenses.

This method is crucial in assessing creditworthiness and financial resilience because it shows the relationship between operational performance and financial liabilities, which is key for lenders and investors. By focusing on both the excess revenues and the obligations such as principal payments and interest, it produces a more comprehensive view of debt repayment capabilities than simply looking at total revenues or assets.