CFA Practice Question

There are 266 practice questions for this study session.

CFA Practice Question

Which of the following statements is the LEAST ACCURATE with respect to why and how cash flow from operations is used to assess the ability of an issuer to service its debt obligations?

A. An analyst can estimate the degree of protection afforded on interest payments due to debtholders.
B. An analyst can examine cash flow to see whether most of the cash generated by a firm is done internally or through external financing.
C. An analyst can determine the extent to which the firm can expand without relying on more new debt.
D. An analyst can determine whether the firm's capital structure is drifting more towards equity or debt.
Correct Answer: D

The cash flow from operations looks only at internally-generated funds. To get an idea of whether the firm is employing more debt or equity, one must examine the cash flow from the financing section.

User Contributed Comments 2

User Comment
ericczhang If D is true as the least accurate purpose, wouldn't B also be true since you would need to compare financing cash flows with CFO to determine whether most fo the cash is generated internally or through external financing?
schweitzdm D is least accurate. With B, you can see how much cash flow is coming from internal operations. That is what we are examining when we analyze CFO.

With D: you have no solid way of judging the structure of cost of capital when you examine CFO.

Someone please correct this if it's wrong!
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