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Cash Flow Management Flashcards

7 cards from real CAT practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 7 Cash Flow Management flashcards as text

  1. Which of the following best explains why profitable companies can still face insolvency?

    Answer: Profit is accrual-based and does not guarantee sufficient cash to meet obligations when they fall due

    Profit includes non-cash items and timing differences, so a business can show high earnings while running out of cash to pay creditors.

  2. A company negotiates with its supplier to extend payment terms from 30 to 60 days. What is the immediate effect on cash flow?

    Answer: Cash is conserved for an additional 30 days, improving short-term liquidity

    Extending payment terms delays cash outflows, freeing up cash for other uses during the extra 30-day window.

  3. Under US GAAP, interest received by a non-financial company is classified on the cash flow statement as:

    Answer: Operating or investing activity (policy choice)

    Under US GAAP, interest received may be classified as either operating or investing activities depending on the company's accounting policy.

  4. A business has $10,000 opening cash, receipts of $85,000, and payments of $90,000 during the period. What is the closing cash balance?

    Answer: $5,000

    Closing cash = $10,000 + $85,000 − $90,000 = $5,000.

  5. What is the key limitation of using the cash flow statement alone to assess a company's financial health?

    Answer: It does not show profitability or the value of non-cash assets and liabilities

    The cash flow statement shows only cash movements and excludes profitability, asset values, and accrual-based obligations, requiring the income statement and balance sheet for a complete picture.

  6. Which working capital management strategy reduces the risk of holding excessive cash while ensuring short-term obligations are met?

    Answer: Maintaining a target cash balance with a revolving credit facility as backup

    A target cash balance supported by a standby credit facility balances opportunity cost of idle cash with the need to cover unexpected payments.

  7. A company's cash flow from operations is $80,000, capital expenditure is $50,000, and debt repayments are $15,000. What is its free cash flow available to equity holders?

    Answer: $15,000

    Free cash flow to equity = Operating cash flow − Capex − Debt repayments = $80,000 − $50,000 − $15,000 = $15,000.