Cash Flow Analysis Flashcards

The cash conversion cycle (CCC) measures:

Answer: Days it takes to convert investments in inventory and receivables into cash

CCC = Days Sales Outstanding + Days Inventory Outstanding − Days Payable Outstanding, quantifying how long operating cash is tied up in the business cycle.

A lengthening cash conversion cycle over multiple periods would most likely concern a credit analyst because it suggests:

Answer: Increasing working capital strain and potential cash flow pressure

A longer CCC means more cash is tied up in working capital for extended periods, increasing the risk of liquidity shortfalls.

When assessing a seasonal business, a credit analyst should primarily evaluate cash flow on a:

Answer: Trailing twelve-month and seasonal peak/trough basis

Seasonal businesses must be evaluated over a full twelve-month cycle and at peak demand periods to capture both the highest debt service burden and the trough liquidity position.

Under the Uniform Credit Analysis (UCA) cash flow method, 'cash after debt amortization' is considered the most meaningful indicator because it:

Answer: Shows cash remaining after all operating needs and scheduled debt payments are met

The UCA method's 'cash after debt amortization' integrates operating cash flow and working capital needs with scheduled debt service to reveal whether the borrower is truly self-sustaining.

Which of the following would be considered a 'quality of earnings' concern when reviewing a borrower's cash flows?

Answer: Operating cash flow persistently lagging reported net income

When operating cash flow consistently trails net income, it suggests income may be inflated by accruals not yet converted to cash, raising earnings quality concerns.

A global cash flow analysis in commercial lending combines the business's cash flow with the guarantor's personal cash flow primarily to:

Answer: Assess the total repayment capacity when business cash flow alone may be insufficient

Global cash flow analysis captures all resources available to service the debt, which is critical when a small business owner's personal finances are intertwined with the business.

In a leveraged buyout (LBO) credit review, the primary concern regarding target company cash flows is whether:

Answer: Post-acquisition free cash flow is sufficient to service the significantly increased debt load

LBOs dramatically increase debt, so the critical credit test is whether the acquired company's operating cash flow can service the new, much higher debt obligations.