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

In a cash flow statement analysis, a firm shows positive operating cash flow, large negative investing cash flow and positive financing cash flow arising from fresh long-term borrowings. Which interpretation best fits this pattern?

The pattern indicates a firm expanding capacity and funding it partly with debt. Heavy outflow on investing means assets are being acquired, while positive financing from new long-term borrowings shows external funds are raised to support that growth. Liquidation or shareholder distributions would show the opposite signs.

  1. AThe firm is expanding capacity and funding it partly through debtCorrect
  2. BThe firm is liquidating assets to repay lenders
  3. CThe firm is distributing surplus cash to shareholders
  4. DThe firm is in decline and selling investments

Explanation

Negative investing flow indicates purchase of fixed assets or investments. Positive financing flow from borrowings shows external funds were raised. Together with positive operating flow, this is the typical profile of an expanding firm partly debt-funded. Asset liquidation or repayment would show positive investing and negative financing flows.

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