Which One Of The Following Is A Source Of Cash? Multiple Choice
Repurchase Of Common Stock
Acquisition Of Debt
Purchase Of Inventory
Payment To A Supplier
Granting Credit To A Customer
Which One Of The Following Is A Source Of Cash? Multiple Choice
Increase In Accounts Receivable
Decrease In Common Stock
Increase In Fixed Assets
Decrease In Accounts Payable
Decrease In Inventory
The Correct Answer and Explanation is:
Question 1:
Which One Of The Following Is A Source Of Cash?
Correct Answer: Acquisition of Debt
Question 2:
Which One Of The Following Is A Source Of Cash?
Correct Answer: Decrease in Inventory
Explanation (Combined for Both Questions — 300+ Words):
In financial accounting, a source of cash refers to any activity or transaction that increases the cash inflows of a business. This is critical for assessing a company’s liquidity and ability to fund operations, invest, or repay obligations.
Question 1 Analysis:
- Repurchase of Common Stock – This is not a source of cash. When a company buys back its own stock, it uses up cash, making it a use of cash.
- Acquisition of Debt – This is a source of cash. When a company takes on new debt (e.g., through issuing bonds or borrowing a loan), it receives cash inflow. This increases the company’s financing but also adds a future obligation to repay.
- Purchase of Inventory – This is a use of cash. Buying inventory requires spending money, decreasing the cash available.
- Payment to a Supplier – Also a use of cash. Paying off accounts payable or suppliers directly reduces the company’s cash.
- Granting Credit to a Customer – This means allowing the customer to pay later (increasing accounts receivable), which ties up cash, making it a use rather than a source.
Thus, Acquisition of Debt stands out as the correct source of cash in this set.
Question 2 Analysis:
- Increase in Accounts Receivable – This is a use of cash, as more money is tied up in credit sales not yet collected.
- Decrease in Common Stock – This implies the company repurchased its stock, which uses cash — again a use, not a source.
- Increase in Fixed Assets – Buying assets like property or equipment requires spending cash, hence it’s a use of cash.
- Decrease in Accounts Payable – Paying off liabilities reduces cash; another use.
- Decrease in Inventory – This is a source of cash. It means the company is either selling more inventory or not purchasing new stock, which helps free up cash.
Therefore, Decrease in Inventory is correctly identified as a source of cash in this context.
Summary:
- Sources of Cash: Activities that bring cash into the business.
- Correct Answers:
- Q1: Acquisition of Debt
- Q2: Decrease in Inventory