CAT Cash Flow Management 3 — Questions and Answers
Question 1: A retailer has annual cost of goods sold of $730,000 and average inventory of $100,000. What is its days inventory outstanding (DIO)?
- 50 days (Correct answer)
- 73 days
- 37 days
- 100 days
Correct answer: 50 days
DIO = (Average Inventory ÷ COGS) × 365 = ($100,000 ÷ $730,000) × 365 ≈ 50 days.
Question 2: Which scenario best illustrates a liquidity risk arising from over-reliance on a single large customer?
- The customer delays payment, causing the supplier to miss payroll (Correct answer)
- The customer places a large repeat order, increasing revenue
- The supplier negotiates extended credit terms with the customer
- The customer's payment increases the supplier's accounts receivable balance
Correct answer: The customer delays payment, causing the supplier to miss payroll
Dependence on one customer means a single late payment can eliminate enough cash inflow to disrupt obligations like payroll.
Question 3: Which of the following would increase a company's operating cash flow without increasing its net income?
- Collecting a long-outstanding receivable (Correct answer)
- Recognising additional revenue on credit
- Purchasing new equipment with cash
- Issuing new share capital
Correct answer: Collecting a long-outstanding receivable
Collecting an existing receivable converts a balance sheet asset to cash without recording new income, boosting operating cash flow.
Question 4: What is the effect on cash flow when a company increases its accounts payable balance?
- Operating cash flow increases because the company is delaying cash payments (Correct answer)
- Operating cash flow decreases because liabilities have risen
- Investing cash flow increases
- Financing cash flow decreases
Correct answer: Operating cash flow increases because the company is delaying cash payments
Rising accounts payable means the company has received goods or services but not yet paid, conserving cash and boosting operating cash flow.
Question 5: A seasonal business expects a large cash shortfall in December. Which short-term financing option is most appropriate?
- An overdraft facility (Correct answer)
- Issuing 10-year bonds
- Selling non-current assets
- A rights issue to shareholders
Correct answer: An overdraft facility
An overdraft facility provides flexible, short-term borrowing that can be drawn and repaid quickly, matching seasonal cash needs.
Question 6: A company's cash flow statement shows positive investing activities but negative operating and financing activities. What does this likely indicate?
- The company is selling assets to fund ongoing losses (Correct answer)
- The company is expanding aggressively using internally generated funds
- The company has strong trading performance
- The company is repaying debt with operational profits
Correct answer: The company is selling assets to fund ongoing losses
Positive investing cash flow combined with negative operating cash flow typically signals asset disposals being used to cover operating shortfalls.
Question 7: When preparing a monthly cash budget, opening cash balance for March equals:
- The closing cash balance at the end of February (Correct answer)
- Net income for February
- Total receipts for March
- Total payments for March
Correct answer: The closing cash balance at the end of February
The opening balance of one period is always the closing balance carried forward from the previous period.
CAT Cash Flow Management 3
A retailer has annual cost of goods sold of $730,000 and average inventory of $100,000.
What is its days inventory outstanding (DIO)?