CFA Level I · CFA Level I Exam · Analyzing Statements of Cash Flows II
A company's net income has grown steadily, but its cash flow from operations has fallen for three years while receivables rose faster than sales. This pattern most likely suggests that:
The pattern suggests low earnings quality. Net income is rising while operating cash flow falls and receivables outgrow sales, so profits are not converting into cash, which may reflect aggressive revenue recognition or deteriorating collections.
- Aearnings quality may be low because profits are not converting to cashCorrect
- Bthe company is improving its collection efficiency
- Cthe company is funding growth with strong internally generated cash
Explanation
Rising receivables faster than sales and falling CFO despite growing income indicate earnings are not turning into cash, which may point to aggressive revenue recognition or weak collections.
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