CFA Level I:FSA : Accounting shenanigans on the cash flow statement(Reading 34)
1. Which of the following will most likely increase a company’s operating cash flow? An increase in:
A. days sales payable (DSP).
B. gains on the sale of long-term assets.
C. use of operating leases versus financing leases. | |
Ans: A.
An increase in the days sales payable would indicate the company is stretching out its payables (that is, delaying payments to its suppliers. By delaying payment, the firm effectively receives no-cost financing.), which would increase the cash from operations.
B is incorrect. Gains (or loss) on the sale of assets has no effect on the net cash flow. It will be a reconciling item under operating cash flow on cash flow statements prepared using the indirect method.
C is incorrect. While the overall change in cash is the same for both types of leases. For a finance lease, the cash outflow from the lease payments are allocated partly to an operating cash outflow (interest expense) under U.S.GAAP and partly to a financing cash outflow (repayment of the lease obligation principal). For an operating lease the entire cash outflow paid on the lease is recorded as an operating cash outflow. So using of operating leases versus financing leases will decrease a company’s operating cash flow. |
|