CCA Cash Flow Analysis 3

Question 1

The cash conversion cycle (CCC) measures:

Accepted Answer

Days it takes to convert investments in inventory and receivables into cash

Answer

CCC = Days Sales Outstanding + Days Inventory Outstanding − Days Payable Outstanding, quantifying how long operating cash is tied up in the business cycle.

Question 2

A lengthening cash conversion cycle over multiple periods would most likely concern a credit analyst because it suggests:

Accepted Answer

Increasing working capital strain and potential cash flow pressure

Answer

A longer CCC means more cash is tied up in working capital for extended periods, increasing the risk of liquidity shortfalls.

Question 3

When assessing a seasonal business, a credit analyst should primarily evaluate cash flow on a:

Accepted Answer

Trailing twelve-month and seasonal peak/trough basis

Answer

Seasonal businesses must be evaluated over a full twelve-month cycle and at peak demand periods to capture both the highest debt service burden and the trough liquidity position.

Question 4

Under the Uniform Credit Analysis (UCA) cash flow method, 'cash after debt amortization' is considered the most meaningful indicator because it:

Accepted Answer

Shows cash remaining after all operating needs and scheduled debt payments are met

Answer

The UCA method's 'cash after debt amortization' integrates operating cash flow and working capital needs with scheduled debt service to reveal whether the borrower is truly self-sustaining.

Question 5

Which of the following would be considered a 'quality of earnings' concern when reviewing a borrower's cash flows?

Accepted Answer

Operating cash flow persistently lagging reported net income

Answer

When operating cash flow consistently trails net income, it suggests income may be inflated by accruals not yet converted to cash, raising earnings quality concerns.

CCA - Certified Credit Analyst Practice Test

CCA - Certified Credit Analyst Practice Test

CCA Cash Flow Analysis 3