Certified Financial Management Specialist Practice Exam

Net cash flow is calculated by subtracting which two components?

1. Long-term assets from current assets

2. Current liabilities from current assets

3. Current liabilities from fixed assets

4. Total expenses from total income

The correct answer is: Current liabilities from current assets

Net cash flow represents liquidity and is a fundamental measure of a company's financial health, indicating how much cash is available after all expenses have been paid. To calculate net cash flow, total income generated by the business must be assessed, and total expenses must be deducted from this figure. The correct choice involves the relationship between current assets and current liabilities. By subtracting current liabilities from current assets, you arrive at net cash flow by gauging the immediate financial resources available to meet short-term obligations. This calculation reflects the cash on hand and the resources readily available after accounting for near-term financial responsibilities, which is essential for assessing operational efficiency and liquidity. Contrastingly, options that involve long-term assets or fixed assets do not directly relate to calculating net cash flow; instead, they are more associated with balance sheet evaluations. Evaluating total income against total expenses, while important for profitability measures, does not specifically capture the liquidity insight that net cash flow provides.