Student Forums CMA Part 2 Section A: Financial Statement Analysis A.4. Special Issues Question ID: CMA2 M1 Q73 (Topic: Special Issues)

Question ID: CMA2 M1 Q73 (Topic: Special Issues)

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  • #209318
    YAVUZ SELIM KACAR
    Participant

    Question ID: CMA2 M1 Q73 (Topic: Special Issues) [Attached]

    Hello,

    Regarding to this question, I know selling fixed assets makes company have more cash at the end of the year than it had at the beginning even if it was not profitable that year.

    However, I think, higher Deposits and prepaids at the end of this year than at the end of last year also makes company have more cash than last year.

    Isn’t it? If not, will you please explain?

    I am always thankful for your very valuable support.

    • This topic was modified 1 year, 5 months ago by YAVUZ SELIM KACAR.
    • This topic was modified 1 year, 5 months ago by YAVUZ SELIM KACAR.
    • This topic was modified 2 months, 3 weeks ago by Gavin Wolfe.
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  • #209337
    Lynn Roden
    HOCK international

    Hi Yavuz Selim Kacar,

    The terms “deposits” and “prepaids” can both be used to refer to deposits or prepaids paid or deposits or prepaids received. If they are deposits and prepaids that have been received, then yes, they could cause cash to increase. But if they are deposits and prepaids that have been paid, then they would cause cash to decrease.

    Even if the deposits and prepaids were items that had been received, though, in absolute terms their value would probably be small compared with other cash sources. Deposits and prepaids are typically smaller amounts on the balance sheet. So even if they represented cash received, it is questionable whether an increase in them would be great enough to overcome a loss on the income statement and cause cash to increase.

    So even though that answer could possibly account for an increase in cash despite a loss, that is not the best answer to the question. In a multiple-choice question, always look for the best answer from among the answer choices. Sometimes there may be another answer that could be the answer, but it may not be the best answer and so it is not the correct answer. This is one of those times.

    Furthermore, the best answer to a multiple-choice question may not be a perfect answer. For example, there may be some cases in which the best answer would not fit. But it will still be the correct answer to the question because it is the best answer from the answer choices available. If you always look for the best answer, it will be more likely that you will choose the correct answer.

    Lynn

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