Question #14
Reading: Reading 12 Evaluating Quality of Financial Reports
PDF File: Reading 12 Evaluating Quality of Financial Reports.pdf
Page: 10
Status: Incorrect
Correct Answer: B
Your Answer: C
Question
High-quality cash flow is least likely to be characterized by:
Answer Choices:
A. No significant differences between operating cash flow and reported earnings
B. Volatility of operating cash flow being lower than that of the firm’s peers
C. Financing cash flows sufficient to cover capital expenditures, dividends and debt repayments
Explanation
High-quality cash flow is characterized by positive OCF that is derived from sustainable
sources and is adequate to cover capital expenditures, dividends, and debt repayments.
Furthermore, high-quality OCF is characterized by lower volatility than that of the firm's
peers. Significant differences between OCF and earnings, or differences that widen over
time, can be an indicator of earnings manipulation.