Chartered Financial Analyst (CFA) Level 1 Practice Exam

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What does cash to income measure?

CFO / operating income
CFO / net income
CFO / total revenue
CFO / total expenses

The correct answer is: CFO / operating income

Cash to income measures the relationship between cash flow from operations and a specific measure of income. In this case, using CFO (cash flow from operations) divided by operating income provides insight into how effectively a company converts its operating income into cash flow. Operating income is a measure of a company’s profitability from its core business operations, excluding the effects of financing and investments. When you compare CFO to operating income, it helps gauge how well the company is translating its earnings into actual cash flow, which is crucial for assessing liquidity, operational efficiency, and underlying business health. If the cash flow from operations is significantly lower than operating income, this could signal potential issues with cash collection or operational difficulties. The other options focus on different aspects of income measurement or other metrics, which do not capture the specific dynamics between cash flow from operations and operating income. Thus, the correct measure that represents cash to income effectively is indeed the ratio of CFO to operating income.