CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

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?

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.
Correct Answer: C

Accrued expenses reduce earnings but do not reduce cash flow since they are not paid until the next accounting period.

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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