CA Cash Flow Management 3 — Questions and Answers
Question 1: Which ratio measures how efficiently a company converts its net income into actual cash flow from operations?
- Cash flow to net income ratio (Correct answer)
- Current ratio
- Quick ratio
- Debt-to-equity ratio
Correct 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.
Question 2: Under IAS 7, interest received by a financial institution is classified as which type of cash flow activity?
- Operating (Correct answer)
- Investing
- Financing
- Either operating or investing depending on policy
Correct answer: Operating
For financial institutions, interest received is part of the core business and therefore classified as an operating cash flow under IAS 7.
Question 3: A company uses a lockbox system primarily to:
- Accelerate the collection of receivables and reduce float (Correct answer)
- Delay payment to suppliers
- Reduce inventory holding costs
- Minimize bank service charges
Correct 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.
Question 4: What is 'disbursement float' in the context of cash management?
- The time between writing a check and when it clears the bank (Correct answer)
- The time between receiving cash and depositing it
- Excess cash held in non-interest-bearing accounts
- The difference between book and bank balances due to timing
Correct 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.
Question 5: In a cash flow forecast, which of the following would be included under capital expenditure outflows?
- Purchase of a new delivery truck (Correct answer)
- Payment of employee wages
- Repayment of a bank loan principal
- Payment of dividends
Correct 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.
Question 6: 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?
- 20% (Correct answer)
- 16%
- 25%
- 12.5%
Correct answer: 20%
Cash return on assets = Operating cash flow ÷ Total assets = $400,000 ÷ $2,000,000 = 20%.
Question 7: Which treasury management technique involves pooling the cash balances of multiple subsidiaries into a single master account?
- Cash pooling (notional or physical) (Correct answer)
- Zero-balance accounting
- Controlled disbursement
- Sweep accounts
Correct 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.
CA Cash Flow Management 3
Which ratio measures how efficiently a company converts its net income into actual cash flow from operations?