FAC Cash Flow Management 3

Question 1

What is the primary purpose of a cash budget in cash flow management?

Accepted Answer

To forecast future cash inflows and outflows over a period

Answer

A cash budget projects expected cash receipts and disbursements to help management plan for surpluses and shortfalls.

Question 2

Which scenario describes a cash flow problem even when a business is profitable?

Accepted Answer

High sales growth leads to large increases in accounts receivable

Answer

Rapid revenue growth can create a cash crunch if receivables grow faster than collections, a common cause of business failure.

Question 3

Which of the following is an example of a financing activity on the cash flow statement?

Accepted Answer

Repayment of a long-term loan

Answer

Repayment of long-term debt is a financing activity because it relates to the company's capital structure.

Question 4

The cash conversion cycle (CCC) is best defined as:

Accepted Answer

Days inventory outstanding plus days sales outstanding minus days payable outstanding

Answer

CCC = DIO + DSO – DPO, measuring how long cash is tied up from inventory purchase to collection.

Question 5

A company wants to shorten its cash conversion cycle. Which action would be most effective?

Accepted Answer

Offering early payment discounts to customers

Answer

Early payment discounts accelerate customer collections, reducing days sales outstanding and shortening the CCC.

(FAC) Finance and Accounting Certification Practice Test