CA Cash Flow Management 2 — Questions and Answers
Question 1: Under IAS 7, which of the following is classified as a financing activity?
- Payment of dividends to shareholders (Correct answer)
- Purchase of property, plant and equipment
- Collection of trade receivables
- Payment of income taxes
Correct answer: Payment of dividends to shareholders
IAS 7 classifies dividends paid to shareholders as financing activities because they represent cash flows related to the entity's capital structure.
Question 2: A company has net income of $500,000, depreciation of $80,000, an increase in accounts receivable of $30,000, and a decrease in accounts payable of $20,000. What is the net cash from operating activities using the indirect method?
- $530,000 (Correct answer)
- $570,000
- $450,000
- $600,000
Correct answer: $530,000
$500,000 + $80,000 (add back non-cash) - $30,000 (AR increase uses cash) - $20,000 (AP decrease uses cash) = $530,000.
Question 3: Which cash flow statement presentation method shows individual cash receipts and payments from operating activities?
- Direct method (Correct answer)
- Indirect method
- Accrual method
- Modified cash basis method
Correct answer: Direct method
The direct method lists actual cash inflows and outflows from operations, such as cash received from customers and cash paid to suppliers.
Question 4: A company's cash conversion cycle is calculated as Days Sales Outstanding plus Days Inventory Outstanding minus:
- Days Payable Outstanding (Correct answer)
- Days Cash Outstanding
- Days Revenue Outstanding
- Days Working Capital Outstanding
Correct answer: Days Payable Outstanding
The cash conversion cycle (CCC) = DSO + DIO - DPO, measuring how long cash is tied up in the operating cycle.
Question 5: Under the indirect method, how is an increase in prepaid expenses treated in the operating activities section?
- Subtracted from net income (Correct answer)
- Added to net income
- Reported separately under investing activities
- Ignored as it is non-cash
Correct answer: Subtracted from net income
An increase in prepaid expenses represents cash paid but not yet expensed, so it is subtracted from net income to arrive at operating cash flow.
Question 6: Which of the following best describes 'free cash flow'?
- Operating cash flow minus capital expenditures (Correct answer)
- Net income plus depreciation
- Total cash inflows minus total cash outflows
- Cash from operations minus dividends paid
Correct answer: Operating cash flow minus capital expenditures
Free cash flow = Operating cash flow - Capital expenditures, representing cash available after maintaining/expanding the asset base.
Question 7: A manufacturing firm experiences a $150,000 increase in inventory during the period. How does this affect the cash flow statement using the indirect method?
- Decrease operating cash flow by $150,000 (Correct answer)
- Increase operating cash flow by $150,000
- Decrease investing cash flow by $150,000
- No effect as inventory is a non-cash item
Correct answer: Decrease operating cash flow by $150,000
An inventory increase means the company spent cash to build stock that hasn't been sold yet, reducing operating cash flow by $150,000.
CA Cash Flow Management 2
Under IAS 7, which of the following is classified as a financing activity?