Question

Which of the following is NOT a potential source of cash for a firm?

options: A decrease in inventory

a. A decrease in equity

b. A decrease in

c. Accounts receivable

d. An increase in retained earnings

Which of the following is NOT a potential use of cash for a firm?

a. An increase in inventory

b.An increase in taxes payable

c. A decrease in long-term debt

d. A decrease in retained earnings

Answer 1

Soution:

(1)Which of the following is NOT a potential source of cash for a firm?

a) A Decrease in Inventory:

An increase in inventory indicates that the company has purchased more goods than it has sold. Since the purchase of additional inventory requires the use of cash, it means there was an additional outflow of cash. A decrease in inventory would be reported as a positive amount, since reducing inventory has a positive effect on the company's cash.

b) Decrease in Equity: When owner equity decrease cash decrease. So decrease in equity is not potential source of cash

C) Decrease in account receivable: When account receivable decrease it means amount has been paid by customer. So Decrease in account receivable is source of funds because money will come.So it is Source of cash

D) Increasein retained earnings: Retained earnings are profit of firm so it  is permanent source of fund of the company it does not lead to payment of cash. So it is also source of cash for firm

Conclusion: So in the end from above explanation we can say (b) Decrease in equity is not a potential source of cash of firm.

ANS: 2 Solution:

a)An increase in inventory: An increase in inventory indicates that the company has purchased more goods than it has sold. Since the purchase of additional inventory requires the use of cash, it means there was an additional outflow of cash.

b)An increase in taxes payable: Income taxpayable is current liability. Dercrease in laibility means company has paid cash for income tax liability.

But here increase in tax payable means liability of tax has not paid and no use of cash. So we can conclude Increase in tax payable is no potential use of cash of firm

c) A Decrease in long-term debt: A long term debt includes bonds, debentures. So when there is sufficient cash flow company have to pay their debts timely. So making long term debts payment it is use of cash for firm.

d) Decrease in retained earning: Retained earnings an amount of income that company keeps for use within the business.This money helps to run business smoothly. there are several factors that can cause reduce retained earnings. For paying dividend company use retained earnings.

Conclusion: So from above explanation point (b) Increase in tax payable is not potential use of cash for firm