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Finance 101 Cash Quiz

Quiz yourself using the following questions. Each question is worth 10 points. A link to reveal the answers is at the bottom of the page.

1. Match the impact on working capital with the actions below

Impact Action
1. Decrease accounts payable A. Largest vendor demands shorter payment terms
2. Increase accounts receivable B. Vendor delivers products directly to customer
3. Decrease inventory C. Launched new services and extended payment plan

Impact Action
1. Decrease accounts payable A. Lower accounts payable will result in a need for more cash or another source of working capital.
2. Increase accounts receivable C. Additional working capital will be required to launch new services and working capital will be tied up in accounts receivables from extending additional credit to customers.
3. Decrease inventory B. Direct shipments reduce the company's investment in inventory and will have a positive impact on working capital.

2. Last year LMS sales volume increased but total sales were flat. What most likely happened?

  • Without looking at the financials we won't really know, but it sounds like LMS is forced to make pricing concessions. This may mean they face a new competitor in the market, or the product is becoming a commodity and no longer as scarce.

3. Review the following cash flow and provide an assessment of the situation:

In USD $ Millions

  • Cash flow from operations: $435
  • Cash from investing: ($600)
  • Cash from financing: $135
  • Net cash is negative by $30 million
  • Free cash flow is negative by $165 million
  • The company needs $30 million to avoid a negative cash position

4. How do you calculate Return on Investment?

It depends. This is a conversation that usually involves a longer horizon of time and significant amount of cash. It is important to have really grounded assumptions and a way to measure risk.

To look at ROI, there are several generally accepted methods to assess if the investment will be worth the expected return including

  • discounting expected cash flow
  • payback and/or
  • internal rate of return

5. Advanced Electronics AR balance doubled over the last 2 months?
How do you investigate if this is a favorable or unfavorable situation?

Here is a start:

  • Did sales increase and if so, how much?
  • What is the A/R turnover rate and how long are the collection periods?
  • What are the customer terms?
  • Is there a problem with the invoicing process?

6. Give at least 3 examples of fixed assets?

  • Building
  • Equipment
  • Land
  • Vehicles

7. What are liabilities and what are they used for?

  • They are claims other people have against the company, they are used to fund assets.

8. True or False: Cost of Goods is equal to Inventory

  • False — normally the cost of goods should represent purchased products sold vs. all product purchases from vendors.

9. True of False: Assets = Liabilities + Equity

  • True — although most people may look at assets — liability equation to test for solvency.

10. True or False: When your company is making a profit, there is always cash in the bank.

  • False — in order to determine cash in the bank we need to look at an accurate balance sheet or cash flow statement.