Cash Flow Management Flashcards

Which ratio measures how efficiently a company converts its net income into actual cash flow from operations?

Answer: Cash flow to net income ratio

The cash flow to net income ratio (operating cash flow ÷ net income) reveals the quality of earnings and how much income becomes actual cash.

Under IAS 7, interest received by a financial institution is classified as which type of cash flow activity?

Answer: Operating

For financial institutions, interest received is part of the core business and therefore classified as an operating cash flow under IAS 7.

A company uses a lockbox system primarily to:

Answer: Accelerate the collection of receivables and reduce float

A lockbox system directs customer payments to a bank P.O. box, allowing faster deposit processing and reducing mail and processing float.

What is 'disbursement float' in the context of cash management?

Answer: The time between writing a check and when it clears the bank

Disbursement float is the time lag from when a check is issued to when it clears the payer's bank account, temporarily inflating the book balance.

In a cash flow forecast, which of the following would be included under capital expenditure outflows?

Answer: Purchase of a new delivery truck

Capital expenditures are funds used to acquire long-term assets like vehicles; this represents an investing cash outflow in forecasting.

A company's operating cash flow is $400,000, net income is $320,000, and total assets are $2,000,000. What is the cash return on assets?

Answer: 20%

Cash return on assets = Operating cash flow ÷ Total assets = $400,000 ÷ $2,000,000 = 20%.

Which treasury management technique involves pooling the cash balances of multiple subsidiaries into a single master account?

Answer: Cash pooling (notional or physical)

Cash pooling consolidates subsidiary balances to optimize interest earned/paid by treating the group's cash position as a single entity.