Question

1. Which of the following changes in working capital will result in an increase in cash flows?

a. increase in account payable

b. increase in inventories

c. decrease in current liabilities

d. increase in accounts receivable

2. Which of the following will occur in a statement of cash flows as a result of paying cash dividends?

a. Cash flows from operations will increase.

b. Cash flows from investments will decrease.

c. Cash flows from the financing will decrease.

d. Cash balances will not be affected.

Answer 1

1) The answer is a) Increase in Account Payables.

Reason:

Increase in Current Assets leads to Decrease in Cashflows from Operating activities while Increase in Current Liabilities leads to Increase in Cashflows from Operating activities. Also Decrease in Current Assets leads to Increase in Cashflows from Operating activities while Decrease in Current Liabilities leads to Decrease in Cashflows from Operating activities.

Logic behind all these is that when Current assets Increases it means more funds gets Blocked while decrease in the same means inflows for the entity. Similarly Increase In Current Liabilities means no outflows for the entity while Decrease in current liabilities leads to Outflows for the entity.

2 The answer is c) Cashflows from the Financing activities will decrease.

Reaon:

Cash Dividends are paid on the Equity or Preference shares which are the source of finance for an entity that why dividends on them are the cash outflows from the financing activities. So the payments of dividends leads to decrease in cashflows from the financing activities.