Deck 17: Statement of Cash Flows Analysis and Earnings Quality

Question 1

Which of the following patterns of cash flow best describes that of a fast growing dynamic firm in a high technology,fast changing industrial sector:
Cash flow from operations Cash flow from investing Cash flow from financing

A) Generates cash Consumes cash Generates cash
B) Consume cash Generates cash Consumes cash
C) Generates cash Generates cash Consumes cash
D) Consumes cash Consumes cash Generates cash

Answer 1

A

Question 2

Which of the four definitions offered best represents 'Free cash flow' for a business entity:

A) Cash flow from operations minus absolute value of cash flow from investing.
B) Cash flow from operations minus absolute value of dividends paid minus interest payments.
C) Cash flow from operations minus investments for the maintenance of the competitive position minus absolute value of average dividends paid minus interest payments.
D) Cash flow from operations minus debt reimbursements.

Answer 2

C

Question 3

A business entity generates a cash flow from operations of 500 in X1,600 in X2 and 700 in X3.The cash outflow from investing is 250 in X1,350 in X2 and 450 in X3 and is only dedicated to the maintenance of the competitive position of the firm.Cash outflow from financing is 150 in X1,-300 in X2 and -600 in X3.What is true of the available cash flow?

A) It is the same in each of the consecutive years.
B) It increases by 40% over the three years.
C) It declines by increasing proportions each year over the previous one.
D) It is equivalent,with an opposite sign to the cash flow from financing.

Answer 3

A

Question 4

Outsourcing can improve the cash flow from operations even if it may deteriorate the profit from operations.

Question 5

A business entity reports,for a complete accounting period,a cash flow from operations at 12% of sales revenue,a cash flow from investing representing an outflow of 50% of cash flow from operations and a cash inflow from financing is equal to half the absolute value of the cash flow from investing.The gross margin ratio is 40%,net profit at 100 CU represents a quarter of the gross margin.If the beginning cash balance was 45 CU,what is the ending cash balance.

A) 145 CU
B) 135 CU
C) 120 CU
D) 90 CU

Question 6

IFRS GAAP requirement that a statement of cash flows be reported (in one of two standard formats)by all business entities is logical because

A) Accrual accounting is no longer valid in today's fast paced economy.
B) Accrual accounting and cash accounting provide different information.
C) Cash accounting is useless in a world where most transactions involve credit.
D) The value of a business entity is best described by its cash position after liquidation.

Question 7

The primary impact of the timing difference between the recognition of 'revenue from sales' and the 'cash collected for customers' is on the level of:

A) Net profit
B) Gross margin
C) Allowance for bad receivables
D) Accounts receivables balance

Question 8

Generally,the operating cash flow is expected to be positive.

Question 9

A retailer is paid cash by its customers but pays its suppliers very regularly but no sooner than 60 days of receipt of their invoice.Monthly sales hold steady at 100 units at 5 CU each.The cost of the merchandise is 3 CU per unit.The firm has been in existence for 100 years.By how much will the amount of cash received from customers in January X1 differ from the amount of sales revenue recognized in that month? The retailer closes it books on 30 June each year.

A) 500 CU
B) 300 CU
C) 200 CU
D) No difference

Question 10

How is the available cash flow calculated?

A) Available cash flow = Cash flow from operating activities (assumed to be positive)+ Cash flow from investing activities (assumed to be negative)
B) Available cash flow = Cash flow from operating activities + Cash flow from financing activities
C) Available cash flow = Cash flow from investing activities + Cash flow from financing activities
D) Available cash flow = Cash flow from operating activities - Dividends paid

Question 11

Two independent business entities A and B were created in X0.They are,today ,relatively similar in size and serve similar but separate markets.They report the following time series for their anticipated net cash flow from investing in both tangible and intangible investments (amounts expressed in CU):

A) Entity B appears to be intent on growing faster than entity A.
B) Entity B appears to offer a lower risk to investors than entity A.
C) Entity A appears to be intent on growing faster than entity B.
D) Entity A demonstrates a better ability to reimburse its long-term debt than entity B.

Question 12

The way IFRS GAAP demand that financial leases be reported encourages firms to:

A) Choose financial leases over outright acquisition in obtaining control over fixed resources to help increase the cash flow from operations.
B) Choose outright acquisition over financial leases in obtaining control over fixed resources to help reduce the cash outflow from investing.
C) Choose financial leases over outright acquisition in obtaining control over fixed resources to help hide the liability that reflects their commitment to owing the periodic lease payment for the duration of the contract.
D) Choose strategically between a financial lease and outright acquisition in order to obtain control over fixed resources since the rules neutralize the impact of the choice on the reported earnings.

Question 13

Of the 4 strategies described below,which one is most likely to lead to the highest increase of the ratio of cash flow from operations to income from operations?

A) Reduce credit terms to customers,increase inventory levels,increase payables
B) Increase credit terms to customers,increase inventory turnover,negotiate longer credit terms with suppliers
C) Reduce credit terms to customers,keep inventory level steady,increase payables
D) Increase sales revenue by extending longer credit terms to customers,reduce inventory levels,and reduce payables faster than inventories are reduced

Question 14

The indirect method of calculation of the cash flow from operations consists of the following steps

A) Start with reported profit after taxes and add-back depreciation allowance for the period.
B) Start with reported profit after taxes,add-back accumulated depreciation,add-back non-cash costs and adjust for the variations of balances of accounts receivable,accounts payable and inventories between the beginning and the closing of the period.
C) Start with reported profit after taxes,add-back depreciation allowance,add-back non-cash costs and adjust for the variations of balances of accounts receivable,accounts payable and inventories between the beginning and the closing of the period.
D) Start with reported profit after taxes,add-back depreciation allowance,add-back interest expenses net of tax shield,and adjust for the variations of balances of accounts receivable,accounts payable and inventories between the beginning and the closing of the period.

Question 15

What ratio is used to calculate 'cash flow yield'?

A) Operating cash flow/Net sales
B) Operating cash flow/Interest paid
C) Operating cash flow/Net income
D) Operating cash flow/Average current liabilities

Question 16

A business entity generates a cash flow from operations of 500 in X1,600 in X2 and 700 in X3.The cash outflow from investing is 250 in X1,350 in X2 and 450 in X3.Cash outflow from financing is 150 in X1,-300 in X2 and 900 in X3.Which of the four alternatives below is coherent with these facts and these facts alone.

A) The entity increased its profit by 40% over the three years.
B) The entity divested more than it invested.
C) The entity borrowed more than it reimbursed.
D) The opening cash balance in X1 is equal to the closing cash balance in X3.

Question 17

A business entity is generating small operating losses year after year and has a large positive cash flow from operations year after year.

A) It is an impossible situation.
B) It is a business entity that provides little value added beyond providing an infrastructure (such as the provision of pipe lines or of rail tracks right-of-ways)and continuously invests in rapidly depreciable assets.
C) It is a business that is doomed.
D) It is an entity that cannot invest in any new assets.

Question 18

A business entity that shows a positive cash flow from operations,a negative cash flow (i.e. ,a cash outflow)from investing and a negative cash flow (i.e. ,a cash outflow)from financing is a business entity which:

A) Is profitable,does not prepare itself for future challenges and reimburses its debt.
B) Is incurring a loss,prepares itself for the future and has obtained new long-term funds from external sources.
C) May be profitable or may experience a loss,probably invests more than it divests and probably has reimbursed some of its debt.
D) May be profitable or may experience a loss,probably divests more than it invests and has issued new common stock for an amount in excess of the amount of dividends paid to current shareholders.

Question 19

Which type of business entity is likely to experience a value closest to 1 for their ratio of cash flow from operations to operating income?

A) An entity enjoying growing market demand for their product,investing in new equipment depreciated by an accelerated method.
B) An ageing entity with shrinking markets,and little R&D spending or new investment.
C) An entity with growing markets that sees it receivables,inventories and payables increase significantly year on year.
D) All three types of business entities.

Question 20

Which of the following action is unlikely to help a business entity increase its cash flow from operations?

A) Push sales at year-end by invoicing before shipment.
B) Grow sales by courting marginal customers not serviced by any other firm.
C) Structure credit terms for customers on the basis of the level of risk of default they represent.
D) Reduce the diversity of suppliers to increase the entity's negotiation power with the remaining selected suppliers.