CFA Practice Question

There are 191 practice questions for this study session.

CFA Practice Question

Which of the following statements is the LEAST ACCURATE with respect to the rationales and drawbacks of using the price-to-cash-flow (P/CF) ratio for valuation purposes?

A. If the definition of cash flow is simply net income plus any non-cash charges, then this metric may be influenced by accounting options.
B. Cash flow is much less subject to manipulation than earnings, thus allowing for a more sound comparison of P/CF among various firms. The P/CF ratio neutralizes any quality of earnings differences which may exist among firms.
C. Even when earnings are negative, free cash flow measures usually are positive, thus allowing a more frequent use of P/CF.
Correct Answer: C

Free cash measures are usually negative just as often as earnings are. Free cash flow is what's left after a company makes its necessary capital expenditures. For a company in a growth phase, this could mean FCF is negative more often than earnings are.

User Contributed Comments 3

User Comment
2014 In FRA, we learned it is myth that Cashflow are not subject to manipulation
stevo I agree, I would have thought that B would be the least accurate as cash flow can be manipulated by accounting options chosen. I guess because B stipulates that it is "much less" and does not rule out the possibility of manipulation.
MathLoser I haven't seen any fin statement that has negative Net Income but positive free cash flow.
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