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Basic Question 1 of 14
The president of the company you are working for needs some advice. She wants to know how it is possible for a company to have incurred a net loss during the year when the cash account balance increased! After reviewing the statement of cash flows, which of the following would most likely be your explanation?
B. Inventory levels increased significantly from the beginning to the end of the year.
C. There were a large number of December (year-end) expenses, which were paid in the following month.
D. The company retired a large amount of debt and paid higher dividends during the current year.
A. The company purchased a large amount of plant assets for cash.
B. Inventory levels increased significantly from the beginning to the end of the year.
C. There were a large number of December (year-end) expenses, which were paid in the following month.
D. The company retired a large amount of debt and paid higher dividends during the current year.
User Contributed Comments 7
| User | Comment |
|---|---|
| morpheus918 | Wouldn't an increase in inventory levels be a use of cash and produce the same result? |
| tony1973 | No morpheus. An increase in inventory level will: 1. reduce (not increase) cash account balance. 2. not affect gain/loss. |
| sarath | Good question ...there were expenses which occured in december but were not paid in december ...so it will effectively increase the cash account balance.... |
| Bibhu | The trick here is to find out the choice which is reported in the cash flow. |
| ldfrench | Is the president Richard Fuld? |
| leon121 | No ldfrench. The president is referred to as a she and irrelevant to the question. |
| ascruggs92 | Purchase of inventory or parts to make inventory are not expensed until that item is sold, at which point it's recognized as COGS |
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Learning Outcome Statements
analyze and interpret both reported and common-size cash flow statements;
calculate and interpret free cash flow to the firm, free cash flow to equity, and performance and coverage cash flow ratios.
CFA® 2024 Level I Curriculum, Volume 3, Module 20.