- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 5. Analyzing Statements of Cash Flows II
- Subject 3. Free Cash Flow Measures
CFA Practice Question
The president of the company you plan to work for needs some advice. She wants to know how it is possible for the company to make money (net income) during the year and yet have the cash balance decline. After reviewing the statement of cash flows, which of the following would most likely explain this situation?
B. Inventory levels decreased significantly from the beginning to the end of the year.
C. There were a large number of December expenses incurred, which have not yet been paid.
D. The company purchased a significant amount of plant assets during the year.
A. The company incurred a significant amount of debt during the year.
B. Inventory levels decreased significantly from the beginning to the end of the year.
C. There were a large number of December expenses incurred, which have not yet been paid.
D. The company purchased a significant amount of plant assets during the year.
Correct Answer: D
A company that invests heavily in new plant assets may drain much or all of the cash flows that are generated from profitable operations. However, the impact of such purchases of plant assets is restricted to the increase in depreciation expense.
User Contributed Comments 3
| User | Comment |
|---|---|
| Khadria | C would be correct if there is a increase in Cash Flow but the income has reduced. |
| lexology | Beg to differ. The key is: having net income and having cash balance decline (DURING THE YEAR). hence, the only way is for the company to buy assets over the year span. |
| wundac | you mean having net income increase and cash balance decline |