Question

i) Which of the following options lists two sources of cash?

a)A decrease in an assets, and an increase in a liability

b)An increase in a liability and a decrease in equity

c)A decrease in an assets, and a decrease in a liability

d)An increase in an assets, and a decrease in equity

ii) You are measuring the impact of a printing company's decision to purchase ink from a supplier that offers a lower price. Which of the four financial drivers are you analyzing?

a)Sales

b)Turnovers

c)Margins

d)Investment in fixed assets.

Answer 1

i)

Option a) A decrease in an assets, and an increase in a liability is correct

Explanation: Decrease in assets will increase the cash flows, for eg. decrease in debtors/receivables (an asset) means realization of cash against the sales earlier made on credit. At time of sales, the sales were recognized, however the cash wasn't received.

Increase in a liability (such as payment for an expense) means deferment of cash payment. Thus an increase in liability will increase the cash flows in the current accounting period, as the expenses have been deferred.

ii)  

Option c) margins is correct

Explanation: For a printing company, ink is a raw material and thus an expense. Increase or decrease in an expense will affect the margins. Here in this case, the supplier is offering a lower price. It will reduce the raw material expense for the company and thus lead to improved margins.