Question

For each of the following scenarios, determine if it is an indicator of potential cash flow problems: (Hint: Review Chapter 5 PowerPoint notes on Slide #23 and Chapter 5 in Textbook on Page 306.) Potential future cash flow problems Yes/No a. Growth in accounts receivable or inventories that is less the growth rate in sales. b. Increases in accounts payable that exceed the increase in inventories. c. Capital expenditures that substantially exceed cash flow from operations. d. Sales of marketable securities are less than purchases of marketable securities.

Answer 1

Answer:

a) yes

b) no

c) yes

d) no

Explanation:

a) if the A/R balance grow higher than the sales is an indicator that our collection cycle increase thus, customer extend their financiation providing less cash flow

b) this is the opposite as (a)  here we extend our financing agaist our suppliers. The payment cycle increases thus, decreasing the overall cash demand

c) If the assets were puirchased on cahs a huge amount was used alrady affecting the liquidity of the company.

If the company finance the purchase of the long term assets, in the future the company will have to dedicate a portion of their future cahs flow to pay up interest and principal which is what we should analize; wether or not the company will have difficulties in the future and the answer is yesin both scenarios.

d) no. It will not, as marketable securities are generally short-term and easily converted into cash in the short term. They do not generate cash flow problems in the long run as the company can sale them anytime to obtain cash.