CFA Practice Question

CFA Practice Question

Which of the following is (are) true?

I. An increase in inventories has a positive impact on cash flows.
II. An increase in receivables has a positive impact on cash flows.
III. Deferred taxes increase current cash balance.
IV. Utilization of tax loss carry-forwards has a positive impact on cash flows.
A. III & IV
B. II & III
C. I & II
Explanation: An increase in inventories implies cash was spent to obtain more goods than were sold. An increase in receivables implies part of the sales were made on credit, not a cash basis. Both of these have a negative impact on cash flows. Deferring taxes implies some of the cash expense was delayed into the future, increasing the current cash balance. Utilization of tax loss carry-forwards implies a reduction in the taxable income by the amount of the carry-forward. This reduces cash expense on taxes.

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