Unit 3.7 True or False - Cash flow

Insolvency occurs when a business has a negative cash flow but may actually be profitable.

• True
• FALSE

The most liquid asset of a business is cash.

• True
• FALSE

Payments from debtors are recorded as a cash inflow for a business.

• True
• FALSE

Working capital is calculated by current assets plus current liabilities.

• True
• FALSE

Answer explanation

False - current assets minus current liabilities

Net cash flow is calculated by subtracting cash outflows from cash inflows.

• True
• FALSE

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
• FALSE

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.

• True
• FALSE

Answer explanation

False - this is the working capital cycle

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
• FALSE

Some current assets, such as debtors and stocks, can take a relatively long time to convert into cash.

• True
• FALSE

Answer explanation

True - this depends on the nature of the business

The working capital cycle shows the movement of cash into and out of the business, during a given period of time.

• True
• FALSE