Question

Please add the explanation.

9. Which of the following would be considered a use of funds?

I. An increase in receivables

II. An increase in payables

III. An increase in inventory

IV. An increase in sales

A) I and III only

B) I and IV only

C) II and III only

D) II and IV only

E) I, III, and IV only

Answer 1

A) "I and III only" are considered as use of Funds. i.e. An Increase in receivables and Increase in Inventory

Increase in Accounts receivable are considerd as use of Funds. When a Supplier of goods and services sells on Credit, the same is recorded as Receivables in the books of the supplier of goods and services. The sale of goods and services are sources of funds however if made on credit results in blocking of funds by giving credit period to the customer. Till the time the receivables are not collected it is use of funds. Once collected it is Source of funds. Hence increase in Receivables is Use of Funds.

Increase in Accounts Payables are considered as Sources of Funds. When a Company purchases goods and services it does not pay to the suppliers of such goods and services immidiately hence a Company increases its cash flow by not immidately paying for the goods and services taken on credit. Hence increase in payables is a Source of funds and not use of funds

Increase in Inventory is considered as use of Funds. Inventory is the goods purchased for sale in subsequent months. When you purchase Inventory you make payment to the suppliers and hence it is use of funds

Increase in sales is considered as sources of funds. When you sale to customer you receive funds from the customer and hence it is sources of funds.