Question

1. Which one of the statement below is false?

a. A company should show a loss for the operating period but have generated positive cash flow for the business.

b. Profit are an accounting measure of performance during a specific period of time.

c. To obtain the operating cash flow, given the net income, we add back depreciation and subtract taxes.

d. Cash flow is an accounting measure of performance during a specific period of time.

2. Often a bank will require a company to pay off its line of credit (return the balance to zero) and keep it there for a specific period of time each year. For example, a requirement might be that the line of credit remains at a zero balance for at least one sixty-day period each year. This is called the clean-up period.

a. True

b. False

3. The return to the investor is the ___

a. reward to the borrower

b. cost to the borrower

c. cost to the manager

d. internal rate of return

Answer 1

1. Option d.     Cash flow is an accounting measure of performance during a specific period of time.

All the rest are true except option d, as it is the profit and loss statement is the accounting measure of performance during a specific period of time and not cash flow.

2. Option a .   True

Clean up period is a clause in the contract of line of credit wherein, it is stated that the borrower is suppose to clear off all the outstanding amount and then they should cease to use the line of credit for a specific period. Hence, the description above is true.

3. The return to the investor is the cost to the borrower

Explanation: It cannot be a reward to the borrower, as it needs to be paid to the investors, cannot be cost to the manager as it is not the manager of the fund who pays to the investors but the borrower or the company who is the borrower. Internal rate of return is the return calculated on the project by the companies and it is for the companies and not the investors.