- CFA Exams
- CFA Level I Exam
- Topic 3. Corporate Issuers
- Learning Module 5. Capital Investments and Capital Allocation
- Subject 3. Capital Allocation Principles and Pitfalls
CFA Practice Question
Which of the following statements is (are) false?
II. Capital allocation decisions must be based on cash flows, not on accounting income.
III. Only incremental cash flows are relevant to the accept/reject investment decision.
IV. Cash flows are the accounting profits generated by a firm.
V. Accounting income includes some items that are not cash flows.
I. The relevant cash flows are the specific cash flows that should be considered in the capital allocation decision.
II. Capital allocation decisions must be based on cash flows, not on accounting income.
III. Only incremental cash flows are relevant to the accept/reject investment decision.
IV. Cash flows are the accounting profits generated by a firm.
V. Accounting income includes some items that are not cash flows.
Correct Answer: IV only
Accounting profits are affected by some non-cash charges that are not cash flows (such as depreciation).
User Contributed Comments 5
| User | Comment |
|---|---|
| spillo | help please |
| CFA1Dec11 | III. Only incremental cash flows are relevant to the accept/reject investment decision. ? Why this is true ? |
| viruss | I guess that it is because previous cash flows (+ and - >> sunk costs)shouldn't be consider. You take into account cash flows from 0 not from t = -4 e.g. |
| robbiecow | Based on the CFAI book you must include opportunity cost in the project costs. Not sure if the assumption here is that opportunity cost is being included in incremental CFs as it is the additional CF realized as a result of a decision. Anyone... |
| vadfir | Incremental cash flow is additional cash flow a firm receives after taking on the project (forget sunk costs, subtract opportunity costs, consider side effects, recognize investment) . So incremental mentioned in III relates to net amount. |