- CFA Exams
- CFA Level I Exam
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 23. Understanding Cash Flow Statements
- Subject 3. Cash Flow Statement Analysis
CFA Practice Question
A company accrued wages of $5,000 and collected accounts receivable of $20,000. Which of the following best describes the effect of these two transactions on the company?
A. Cash from operations will decrease.
B. Current ratio will decrease.
C. Net income will increase.
Explanation: Accruing wages increases current liabilities and expenses but collecting receivables has no effect on current assets or sales, therefore the current ratio and net income both decrease. Collecting accounts receivable increases cash flow from operations and accruing wages increases current liabilities, which also increases cash flow from operations, so cash from operations will increase, not decrease.
User Contributed Comments 3
| User | Comment |
|---|---|
| kamal316 | I got it right because the other two were wrong !! |
| Anna_u | Why collecting AR doesn’t increase current assets for 20,000? I suggested it should be A because increase in CA decreases CFO Why I’m wrong? |
| dbalakos | Anna collecting AR means that the item decreased, we have collected 20,000 and OCF will be increased |