CFM Cash Flow Management 1 — Questions and Answers
Question 1: Which section of the cash flow statement includes collections from customers and payments to suppliers?
- Investing activities
- Financing activities
- Operating activities (Correct answer)
- Non-cash activities
Correct answer: Operating activities
Operating activities include cash flows directly related to a company's core business operations, such as collections from customers and payments to suppliers.
Question 2: Under the indirect method of preparing the cash flow statement, net income is adjusted for what?
- Dividends paid to shareholders
- Changes in working capital and non-cash items (Correct answer)
- Capital expenditures
- Proceeds from debt issuance
Correct answer: Changes in working capital and non-cash items
The indirect method starts with net income and adjusts for non-cash items (like depreciation) and changes in working capital to arrive at operating cash flow.
Question 3: Which of the following is classified as an investing activity in the cash flow statement?
- Payment of dividends
- Repayment of long-term debt
- Purchase of equipment (Correct answer)
- Issuance of common stock
Correct answer: Purchase of equipment
Purchases and sales of long-term assets such as property, plant, equipment, and investments are classified as investing activities.
Question 4: What does free cash flow (FCF) represent?
- Net income plus depreciation
- Cash from operations minus capital expenditures (Correct answer)
- Total cash on the balance sheet
- Revenue minus all operating costs
Correct answer: Cash from operations minus capital expenditures
Free cash flow is calculated as operating cash flow minus capital expenditures, representing cash available after maintaining and expanding the asset base.
Question 5: A company with positive net income but negative operating cash flow most likely has:
- Declining revenues
- Significant working capital buildup (e.g., receivables or inventory growth) (Correct answer)
- Excessive capital expenditures
- High dividend payments
Correct answer: Significant working capital buildup (e.g., receivables or inventory growth)
When working capital accounts like receivables or inventory grow faster than earnings, operating cash flow can turn negative even with positive net income.
Question 6: What is the cash conversion cycle (CCC)?
- The time to convert fixed assets into cash
- DIO + DSO − DPO, measuring how long cash is tied up in operations (Correct answer)
- The ratio of operating cash flow to net income
- The number of days to repay long-term debt
Correct answer: DIO + DSO − DPO, measuring how long cash is tied up in operations
The cash conversion cycle (DIO + DSO − DPO) measures how many days it takes to convert inventory investments into cash collected from customers.
CFM Cash Flow Management 1
Which section of the cash flow statement includes collections from customers and payments to suppliers?