Which one of the following is a use of cash?
a) Decrease in fixed assets.
b) Decrease in inventory.
c) Increase in long-term debt.
d) Decrease in accounts receivables.
e) Decrease in accounts payable.
Cash management refers to the managing the flow of cash in an organisation so as to not hamper the production process and run it smoothly. It includes preparation of cash budget, estimated cash flow and funds flow statement, etc.
Answer and Explanation:
The correct choice is Option E.
Use of cash refers to the undertaking if a transaction which requires payment in cash.
A decrease in fixed asset would be a result of sales of fixed assets or depreciation both of which do not involve paying cash.
Decrease in inventory means it is converted to sales and hence cash is not paid but received in this case.
Similarly, decrease in accounts receivable means that the receivables are clearing their account hence the company would receive cash.
Increase in long term debt means that the company has taken a debt either in form of bonds or bank loan. In both cases, the company would receive cash.
In case of only decrease in accounts payable, the company needs to pay cash to the suppliers to reduce the liability.
Hence, Only decrease in accounts payable is a use of cash.
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from Finance 101: Principles of FinanceChapter 18 / Lesson 4