3.7 Cash Flow IB Diploma

Assume a firm sells goods costing $40.000 for $55.000. It provides the customer with 70% trade credit (i.e. the customer pays only 30% of the price as a down payment). The profit earned is ______, and the cash received is _______.

• 1. $15.000, $12.000

• 1. $15.000, $16.500

• 2. $15.000, $28.000

• 2. $15.000, $55.000

Answer explanation

The profit earned is $15,000, and the cash received is $16,500.

The profit is calculated as follows:

Profit = Sales - Cost of goods sold

In this case, the profit is:

Profit = $55,000 - $40,000 = $15,000

The cash received is calculated as follows:

Cash received = Down payment + Trade credit

In this case, the cash received is:

Cash received = $55,000 * 30/100 + $55,000 * 70/100 = $16,500

Therefore, the profit earned is $15,000, and the cash received is $16,500.

Here is a breakdown of the calculation:

• Cost of goods sold: $40,000

• Sales: $55,000

• Profit: $15,000

• Down payment: $16,500 * 30/100 = $5,050

• Trade credit: $16,500 * 70/100 = $11,450

• Cash received: $5,050 + $11,450 = $16,500

1. What is the money available to pay for day to day operational costs called?

• 1. Cash

• 1. Working Capital

• 1. Profit

• 1. All of the above

Answer explanation

The money available to pay for day to day operational costs is called working capital.

1. The term_____  describes how efficiently an asset can be converted into cash. 

• 1. Liquidity

• 1. Solvency

• 2. Conversion Rate

• 1. Working Capital Cycle

1. What is the time lag that occurs between when a firm pays its operational and production expenses, and when a firm receives cash from the sale of a product called? 

• 1. Cash flow cycle 

• 2. Cash inflow/ outflow cycle

• 1. Working Capital cycle

• 1. Operating Cycle

Answer explanation

The time lag that occurs between when a firm pays its operational and production expenses, and when a firm receives cash from the sale of a product is called the Working Capital Cycle

1. Which of the following is not a reason to develop a cash flow forecast?

• 1. External lenders may wish to see them before loaning money

• 1. They illustrate the level of gearing of a firm

• 1. They help identify and plan for periods of liquidity problems

• 1. They encourage better financial control 

Answer explanation

The answer is They illustrate the level of gearing of a firm.

Here are the reasons why you would develop a cash flow forecast:

• To identify and plan for periods of liquidity problems: A cash flow forecast can help you to identify when you are likely to have cash flow problems, so that you can take steps to avoid them. For example, you may need to increase your sales, reduce your expenses, or borrow money.

• To encourage better financial control: A cash flow forecast can help you to track your cash flow and identify areas where you can improve your financial control. For example, you may be able to improve your cash flow by reducing your inventory levels or by negotiating better payment terms with your suppliers.

• To satisfy external lenders: External lenders may wish to see a cash flow forecast before they loan you money. This is because they want to know that you are able to repay the loan.

The level of gearing of a firm is not directly related to cash flow. Gearing is a measure of the amount of debt that a company has relative to its equity. A high level of gearing can make a company more risky, as it means that the company has to pay more interest on its debt. However, a high level of gearing does not necessarily mean that a company is going to have cash flow problems.

1. In a given cash flow forecast, the closing balance in June would become the_____ of July. 

• 1. Closing balance

• 1. Working capital

• 1. Net cash flow

• 1. Opening balance

1. From the information in the table below, the opening balance on April 1st is _______ and the net cash flow in April is______.

• 1. $192.500, $35.800

• 1. $35.800, $228.300

• 1. $309.600, $68.150

• 1. Cannot be determined

Answer explanation

The opening balance on April 1st is $192,500 and the net cash flow in April is $35,800.

The opening balance is the amount of cash that is available at the beginning of a period. In this case, the opening balance is the closing balance from the previous period, which is $192,500.

The net cash flow is the difference between a company's cash inflows and its cash outflows. In this case, the net cash flow is $117,100 - $48,950 - $32,350 = $35,800.

Here is the calculation of the net cash flow:

Net cash flow = Cash inflows - Cash outflows
= $117,100 - $48,950 - $32,350
= $35,800

From the information in the table below, the net cash flow in December is _______ and the closing balance on December 31st is______.

• 1. $72.000, $15.000

• 2. $87.000, $135.000

• 1. $15.000, $165.000

• 2. Cannot be determined

Answer explanation

The net cash flow in December is $15,000 and the closing balance on December 31st is $165,000.

The net cash flow is the difference between a company's cash inflows and its cash outflows. In this case, the net cash flow is $78,000 - $63,000 = $15,000.

The closing balance is the amount of cash that is available at the end of a period. In this case, the closing balance is the opening balance plus the net cash flow, which is $150,000 + $15,000 = $165,000.

Here is the calculation of the net cash flow and the closing balance:

Net cash flow = Cash inflows - Cash outflows
= $78,000 - $63,000
= $15,000

Closing balance = Opening balance + Net cash flow
= $150,000 + $15,000
= $165,000

1. Which of them would not cause a cash flow problem?

• 1. Understocking

• 1. Overborrowing

• 1. Poor credit control

• 1. Seasonal demand fluctuations

Which of the following strategies would not be effective in alleviating a cash flow problem?

• a. Investing in more efficient machinery

• b. Minimizing cash outflows (e.g. by holding less stock)

• c. Securing alternative sources of finance

• d. Boosting cash inflows (e.g. through an enhanced marketing mix)