Skip to content

ACCA Applied Knowledge · Financial Accounting · Statement of cash flows (excluding partnerships)

Which of the following is the most likely reason why a profitable entity reports a significant decrease in its cash balance over the year?

Increasing trade receivables by giving customers longer credit explains falling cash despite profit, because sales are recognised in profit before cash is collected. Depreciation and bonus issues involve no cash outflow, and selling a non-current asset brings cash in.

  1. AIt sold a non-current asset at a profit
  2. BIt increased its trade receivables substantially because of longer credit terms given to customersCorrect
  3. CIt charged a higher depreciation expense
  4. DIt made a bonus issue of shares

Explanation

A rise in receivables means profit has been earned but not yet collected in cash, so operating cash flow is lower than profit. Depreciation is a non-cash expense added back and does not reduce cash. A bonus issue involves no cash, and a disposal of an asset brings cash in.

Did you get it right without looking?

One question tells you little. A timed set on Statement of cash flows (excluding partnerships) shows your real accuracy, how long you take and where you lose marks.

Practise Statement of cash flows (excluding partnerships)Free diagnostic mock

More Statement of cash flows (excluding partnerships) questions