3.7 True or False

Unit 3.7 True or False - Cash flow

To test your understanding of this topic (Cash flow), answer the following true or false questions.

No.	Statement	True or False?
1.	Insolvency occurs when a business has a negative cash flow but may actually be profitable.	True
2.	The most liquid asset of a business is cash.	True
3.	Payments from debtors are recorded as a cash inflow for a business.	True
4.	Working capital is calculated by current assets plus current liabilities.	False - current assets minus current liabilities
5.	Net cash flow is calculated by subtracting cash outflows from cash inflows.	True
6.	Working capital is the money needed to pay for the day-to-day running costs of a business, such as wages, utility bills, and the purchase of raw materials.	True
7.	The period of time between the point cash being spent on the production of a product and the collection of cash from a customer is called the profitability cycle.	False - this is the working capital cycle
8.	An increase in the value of debtors will mean a reduction in cash inflows and decrease in net cash flow in the immediate time period.	True
9.	Some current assets, such as debtors and stocks, can take a relatively long time to convert into cash.	True - this depends on the nature of the business
10.	The working capital cycle shows the movement of cash into and out of the business, during a given period of time.	True
11.	Repayments on a bank loan can be categorized as a cash inflow for a business.	False - repayments are recorded as cash outflows
12.	Cash inflows represent money coming into a business for a given time period.	True
13.	It is generally desirable for the working capital cycle to be long.	False - shorter cycles tend to be better for liquidity reasons
14.	A decision to accelerate investment in plant and machinery will increase cash outflows and decrease the net cash flow for a business in the short or immediate term.	True
15.	Dividend payments to shareholders are recorded as a cash outflow for a business.	True
16.	A reduction in stocks of raw materials will reduce the cash outflows of a business and consequently improve its net cash flow in the short term.	True
17.	Shortening of payment times to suppliers will increase cash outflows and decrease the net cash flow of a business in the short term.	True
18.	In a cash flow statement, the closing balance is the sum of the opening balance plus net cash flow for the given time period in question.	True
19.	Offering an extension of credit payment terms to customers will reduce cash inflows so increase the net cash flow for a firm in the short term.	False - this lengthens the working capital cycle
20.	The cash borrowed from a commercial bank is recorded as a cash inflow for a business.	True
21.	Working capital refers to the money available for the day to day running of a business.	True
22.	A firm's working capital is calculated by subtracting its current liabilities from current assets.	True
23.	Net cash flow refers to the difference between cash inflows and cash outflows for a given period of time.	True
24.	Growth is the stage in a business’s life cycle when investment is lowest and profit and net cash flow are highest.	False - this happens at maturity
25.	The return on capital employed (ROCE) is a liquidity ratio that can be used to determine the liquidity position of a firm.	False - the acid test and current ratio are used for this

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3.7 True or False