Got a question on Cash flow from Q-Bank. Which of the following is NOT a reason that cash flow information is important to investment decision-making? Cash flow information allows decision makers to determine whether: A) regular operations generate enough cash to continue business. B) unforeseen obligations can be met. C) new business opportunities that may arise can be taken advantage of by the company. D) regular operations generate enough income to pay off existing debt prior to maturity. The correct answer is D but why not B or C.
My initial reaction is B and C are nonrecurring items that are unusual or extraordinary (or whatever other names they give it) cash flows. Therefore, cannot necessarily be used to predict a firm’s regular performance in investment decision making process.
I think the key here is you have to think from an investor’s perspective, when you invest in something, presumably, you want something that has good fundamental from it’s regular operations, so a) is out, you also want something that has the prospect of growing/expansion, so your investment will grow as well, so c) is out too, down to b) and d), for b), it’s part of the going concern question you need to ask about the company, whereas for d), by regular operations, it’s probably alluding to CFO, and since debt can be refinanced at maturity or be paid off by issuing new equity or other debt, it’s a financing issue, so there is no need for CFO to be able to cover it that’d be how I would reason this one out…it’d be good if some other masterminds on this forums like Joey can comment on this one
As an investor, you want to make sure that the company can withstand shocks to them and still stay in business. Bankruptcy equals screwed for equity investors, and if they are barely generating cash, thats a real risk. Also, wouldn’t you like to know that a company can generate enough cash to invest in new positive NPV projects that will randomly come around which will grow you investment. Without sufficient cash flow, they may miss out on these. A) is self explanatory D) why would you really care if they have enough cash to retire debt PRIOR to maturity.
D might be a viable answer. except it uses the word income instead of cash
because “income” includes noncash items Edit: ohh, I see SuperI already made the point