hard · Principles of Finance financial-statements-markets-wc
A profitable firm reports a $40M increase in accounts receivable, a $25M increase in inventory, a $30M increase in accounts payable, and a $15M increase in a 'deferred revenue' liability during the year. Midway through the year it also factored $50M of receivables WITHOUT recourse, derecognizing them and booking the proceeds in operating cash flow.
Holding all else equal, what is the net effect of these working-capital items on cash flow from operations versus what a naive analyst would compute by reading only the balance-sheet changes?
- Reported CFO is $50M HIGHER than the balance-sheet-change estimate, because the factored receivables suppressed the reported AR increase that the naive analyst never sees
- Reported CFO is $50M LOWER than the balance-sheet-change estimate, because factoring removes receivables that the naive estimate would have added back as a source
- Reported CFO equals the balance-sheet estimate, because the factoring proceeds and the receivable reduction are offsetting entries of equal magnitude
- Reported CFO is $20M higher, equal to the net of the $40M AR rise and the $30M payable rise plus deferred revenue
Sign up free to see the explanation and track your rank →
More Principles of Finance financial-statements-markets-wc practice
- What is the Cash Flow from Operations (CFO)?
- What are its Current Ratio and Quick Ratio respectively?
- What is the Enterprise Value (EV) of the firm?
- What is the Interest Coverage Ratio?
- If the firm is 100% equity financed, what is its ROE?
- Which of the following would be categorized as a 'Cash Flow from Investing Activities' on
- What is the company's Interest Coverage Ratio?
- What is the firm's Quick Ratio?