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NISM Certifications · NISM-Series-XV: Research Analyst · Company Analysis - Financial Analysis

Which of the following would most likely cause a company's operating cash flow to be significantly lower than its reported net profit?

A sharp rise in trade receivables most likely makes operating cash flow fall below net profit. Revenue is recognised in profit, but cash has not yet been collected. Depreciation and amortisation are non-cash expenses that are added back, and higher payables retain cash, so they do not cause this gap.

  1. AA sharp rise in trade receivablesCorrect
  2. BA large depreciation charge
  3. CAn increase in trade payables
  4. DAmortisation of intangible assets

Explanation

Rising receivables means profit was booked on credit sales but cash was not collected, reducing operating cash flow relative to profit. Depreciation and amortisation are non-cash charges added back, and higher payables conserve cash.

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