Question

Which one of the following will decrease the cash flow from assets, all else equal? Select one: a. decrease in the change in net working capital b. increase in cash flow to stockholders
c. increase in cash flow to creditors
d. increase in net capital spending
e. increase in operating cash flow

Answer 1

The answer for the above question is (a).

The question clearly states decrease in cash flow from assets . Assets includes both long term and current assets . For choosing decrease in change in net working capital we need to understand its defination

Working capital- Working capital is the capital used in the business for daily operations.. In accounting parlance working capital is denoted as - CURRENT ASSET - CURRENT LIABITIES. Where current assets comprises of - debtors, stoocks, bill receivables, cash etc. While current liabilties include - short term creditors, bills payable, outstanding expenses etc.

Change in net working capital- is the difference in the working capital between two reporting periods.

For- Eg - Cash  in previous reporting period- $10000 and during the current period $ 2000 has been paid for some expenses which results in decrease in the current assets in the current year which in turn will result in decrease in net working capital.

Since the question specifically mentions decrrease in cashflow due to assets which means it is assumed all liabilties remains unchanged

Reasons for not selecting the remaining option-

(B).Increase in stockholder's funds arises in case of increase in the reserves surplus or by fresh issue of share . In either case it wont decrease the cashflow.

(C) Increase cashflow to creditors- Since the question is specific about decrease in cashflow due to change in assets all other being equal . So we ll see impact of cashflow only with respect to assets.

(D) Increase in net capital spending - Increase in capital spending need not affect the cash flow necessarily a unless the spending is made in cash specifically.

( E) Increase in operating cashflow - Since the question is talking about decrease in the cashflow due to decrease in the assets therefore this option is ruled out.