1．Discretionary cash flow is defined as net earnings + depreciation + deferred income taxes - noncash revenue items included in net earnings - increase in adjusted noncash working capital - capital expenditures - cash dividends. This definition is equivalent to which of the following?

A)   Cash from financing - dividends payable.

B)   Free operating cash flow - cash dividends.

C)   Cash from investing - cash from operations.

D)   Cash from financing - cash from investing.

2．Which of the following statements about the ratio of cash flow from operations to capital expenditures is FALSE?

A)   The higher the ratio, the greater the financial flexibility.

B)   A declining ratio may mean the firm could have difficulty financing future growth internally and may have to support growth with external financing.

C)   This ratio is especially useful for capital intensive firms and utility companies.

D)   An increasing ratio may imply that the firm has recently expanded but has not yet generated the increased cash flow from operations necessary to bring the ratio back to its normal level.

3．Which of the following statements addressing the use of cash flow analysis to assess the ability of the issuer to service its debt is FALSE?

A)   The ratio of cash flow from operations to long-term debt is an indicator of a firm's flexibility with regard to financing decisions.

B)   The statement of cash flows allows the analyst to assess a firm's financial flexibility.

C)   Discretionary cash flow can be used to determine the company's ability to pay down its debt obligation.

D)   The level of discretionary cash flow indicates how safe is the company's dividend.

4．Discretionary cash flow is defined as:

A)   net income + noncash expenses ± changes in current assets and current liabilities (excluding cash).

B)   net income + depreciation +/– other noncash items + decrease (increase) in noncash current assets + increase (decrease) in nondebt current liabilities - capital expenditures - cash dividends.

C)   the total amount of cash collected and paid out by the firm.

D)   net income + noncash expenses - noncash revenue items included in net income.

1．Discretionary cash flow is defined as net earnings + depreciation + deferred income taxes - noncash revenue items included in net earnings - increase in adjusted noncash working capital - capital expenditures - cash dividends. This definition is equivalent to which of the following?

A)   Cash from financing - dividends payable.

B)   Free operating cash flow - cash dividends.

C)   Cash from investing - cash from operations.

D)   Cash from financing - cash from investing.

The correct answer was  B)

Cash from operations = net earnings + depreciation + deferred income taxes - noncash revenue items included in net earnings - increase in adjusted noncash working capital. Hence, discretionary cash flow = CFO - cap ex

2．Which of the following statements about the ratio of cash flow from operations to capital expenditures is FALSE?

A)   The higher the ratio, the greater the financial flexibility.

B)   A declining ratio may mean the firm could have difficulty financing future growth internally and may have to support growth with external financing.

C)   This ratio is especially useful for capital intensive firms and utility companies.

D)   An increasing ratio may imply that the firm has recently expanded but has not yet generated the increased cash flow from operations necessary to bring the ratio back to its normal level.

The correct answer was  D)

A declining ratio may indicate that the firm has gone through a major capital expansion and needs more time before cash flow from operations will increase enough to bring the ratio back up again.

3．Which of the following statements addressing the use of cash flow analysis to assess the ability of the issuer to service its debt is FALSE?

A)   The ratio of cash flow from operations to long-term debt is an indicator of a firm's flexibility with regard to financing decisions.

B)   The statement of cash flows allows the analyst to assess a firm's financial flexibility.

C)   Discretionary cash flow can be used to determine the company's ability to pay down its debt obligation.

D)   The level of discretionary cash flow indicates how safe is the company's dividend.

The correct answer was  A)

When it comes to financing decisions, an indicator of financial flexibility is the ratio of cash flow from operations to capital expenditures.

4．Discretionary cash flow is defined as:

A)   net income + noncash expenses ± changes in current assets and current liabilities (excluding cash).

B)   net income + depreciation +/– other noncash items + decrease (increase) in noncash current assets + increase (decrease) in nondebt current liabilities - capital expenditures - cash dividends.

C)   the total amount of cash collected and paid out by the firm.

D)   net income + noncash expenses - noncash revenue items included in net income.

The correct answer was  B)

Discretionary cash flow = net income + depreciation +/– other noncash items + decrease (increase) in noncash current assets + increase (decrease) in nondebt current liabilities - capital expenditures - cash dividends.

It represents the cash flow available to a firm after it has funded its basic operating requirements.