Skip to content

CMA Intermediate · Financial Management and Business Data Analytics · Fund Flow Statement - Preparation and Analysis

A finance analyst reviews a company's fund flow statement and finds that a large part of the funds used to purchase fixed assets came from a rise in short-term bank borrowings rather than from long-term sources. The most appropriate interpretation is that the company:

The company faces liquidity strain. Short-term bank borrowings are current liabilities repayable soon, while fixed assets earn returns over many years. Funding long-term assets with short-term funds is a maturity mismatch that reduces working capital and increases refinancing risk, so the financing policy is unsound.

  1. AHas improved its liquidity because working capital rose
  2. BHas followed a sound financing policy by matching assets and liabilities
  3. CHas a risk of liquidity strain because long-term assets are financed by short-term fundsCorrect
  4. DHas increased its owners' equity base

Explanation

Short-term borrowings are current liabilities and must be repaid soon, whereas fixed assets yield returns over many years. Financing the latter by the former is a mismatch and strains working capital, so liquidity risk rises. Working capital would actually fall, not rise, as current liabilities increase.

Did you get it right without looking?

One question tells you little. A timed set on Fund Flow Statement - Preparation and Analysis shows your real accuracy, how long you take and where you lose marks.

Practise Fund Flow Statement - Preparation and AnalysisFree diagnostic mock

More Fund Flow Statement - Preparation and Analysis questions