CAT Cash Flow Management 2 — Questions and Answers
Question 1: A company collects 60% of credit sales in the month of sale and 40% the following month. If January sales are $50,000 and February sales are $80,000, what are cash collections in February?
- $68,000 (Correct answer)
- $74,000
- $48,000
- $80,000
Correct answer: $68,000
February collections = 60% × $80,000 + 40% × $50,000 = $48,000 + $20,000 = $68,000.
Question 2: Which cash flow statement method shows individual cash receipts and payments from operating activities?
- Direct method (Correct answer)
- Indirect method
- Accrual method
- Net present value 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 3: A business has operating cash outflows of $120,000 and operating cash inflows of $95,000. What is the net operating cash flow and its implication?
- −$25,000; negative, potential liquidity concern (Correct answer)
- $25,000; positive, healthy operations
- −$25,000; positive, investing activity
- $215,000; total cash flow
Correct answer: −$25,000; negative, potential liquidity concern
Net operating cash flow = $95,000 − $120,000 = −$25,000, indicating the business is spending more cash than it generates from operations.
Question 4: Which of the following is classified as a financing activity in a cash flow statement?
- Repayment of a long-term bank loan (Correct answer)
- Purchase of equipment
- Receipt of dividend income
- Sale of inventory
Correct answer: Repayment of a long-term bank loan
Repayment of a long-term bank loan involves transactions with lenders and is therefore a financing activity.
Question 5: What is the primary purpose of a cash budget?
- To forecast future cash surpluses and shortfalls so management can plan financing or investment actions (Correct answer)
- To record historical cash transactions for audit purposes
- To calculate net profit for the accounting period
- To value inventory on the balance sheet
Correct answer: To forecast future cash surpluses and shortfalls so management can plan financing or investment actions
A cash budget projects cash inflows and outflows over a future period so management can anticipate and address liquidity needs.
Question 6: Under the indirect method, how is depreciation treated in the reconciliation of net income to operating cash flow?
- Added back to net income because it is a non-cash expense (Correct answer)
- Subtracted from net income because it reduces asset value
- Ignored as it has no cash impact
- Reported under investing activities
Correct answer: Added back to net income because it is a non-cash expense
Depreciation reduces net income but does not require a cash outflow, so it is added back when reconciling to cash from operations.
Question 7: A firm has a cash conversion cycle of 45 days. If it extends its payables payment period by 10 days without changing receivables or inventory, what happens to the cycle?
- It decreases to 35 days (Correct answer)
- It increases to 55 days
- It remains at 45 days
- It decreases to 25 days
Correct answer: It decreases to 35 days
The cash conversion cycle = DIO + DSO − DPO; increasing DPO by 10 days reduces the cycle from 45 to 35 days.
CAT Cash Flow Management 2
A company collects 60% of credit sales in the month of sale and 40% the following month.
If January sales are $50,000 and February sales are $80,000, what are cash collections in February?