Certified Financial Management Specialist Practice Exam

How is cash flow calculated?

1. Sum current assets, add current liabilities

2. Sum current assets, subtract current liabilities

3. Sum total income, subtract total expenses

4. Sum sales revenue, subtract costs of goods sold

The correct answer is: Sum current assets, subtract current liabilities

Cash flow is a measure of how much cash is generated or consumed within a specific period and is essential for understanding a company's liquidity position. The correct method for calculating cash flow involves considering a company’s total income and expenses, which reflects the net cash available. While the choice that suggests summing current assets and subtracting current liabilities might be the one selected, cash flow is more accurately determined by the movement of cash through the business rather than simply looking at assets and liabilities concurrently. In the context of calculating operational cash flow, total income minus total expenses is the standard approach. This calculation reflects the net cash generated from operating activities, which directly impacts the company's ability to fund operations, invest in growth, and ensure financial stability. Sales revenue and costs of goods sold focus specifically on income generation and cost of production, which are crucial for calculating gross profit but do not provide a complete picture of cash flow. This makes option D less comprehensive for evaluating overall cash flow. Understanding these nuances helps provide clarity on cash flow management and financial health, which are crucial components of effective financial management.