Question

Select all the reasons why a growing company might experience a decline in cash:

Group of answer choices

It buys a subsidiary business to add a new revenue stream.

It is making a lot of investments in equipment that are capitalized.

To fuel its sales growth, it extends large amounts of credit to its customers in the form of accounts receivable.

It cannot properly forecast demand, so to avoid disruption in fulfilling orders it keeps extra inventory on hand.

As the business grows, it can rely less on offering credit to its customers.

As a result of its success, it pays dividends/distributions to its owners, but the amount it pays exceeds the cash flow generated in a given year.

To fuel its sales growth, it requires large amounts of credit from its suppliers in the form of accounts payable.

To fuel its sales growth, it draws on a bank line of credit.

Answer 1

Buying a subsidiary business for adding a new revenue stream through cash purchase will result in decline in cash.

When a firm is making lot of investments in capitalized equipment, even then the cash flow will fall ie cash flow from investing.

If a firm extends large amount of credit to customers, then the sales are mostly done in credit and not cash thus resulting in decline in cash

Due to inability to properly forecast demand, as the firm is keeping more inventory, there will be more cash tied up in working capital thus causing a decline in cash.

If the company pays dividends that exceeds the cash flow generated in a year, then the cash position would decline.