CAT Cash Flow Management 3

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)?

Accepted Answer

50 days

Answer

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?

Accepted Answer

The customer delays payment, causing the supplier to miss payroll

Answer

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?

Accepted Answer

Collecting a long-outstanding receivable

Answer

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?

Accepted Answer

Operating cash flow increases because the company is delaying cash payments

Answer

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?

Accepted Answer

An overdraft facility

Answer

An overdraft facility provides flexible, short-term borrowing that can be drawn and repaid quickly, matching seasonal cash needs.

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