Chartered Financial Analyst (CFA) Level 1 Practice Exam

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What is the correct formula for investing and financing?

CFO / cash outflows from investing and financing activities
CFO / net cash from financing activities
CFO / gross investments
CFO / total cash flows

The correct answer is: CFO / cash outflows from investing and financing activities

The correct formulation for analyzing the relationship between cash flows from operations (CFO) and cash flows related to investments and financing activities is indeed represented by the expression of CFO divided by cash outflows from investing and financing activities. This ratio helps to assess the ability of a company to generate cash from its operations relative to its cash outflows from investing and financing activities. It provides insight into how well the operational cash flows can cover the expenditures tied to both the acquisition of long-term assets (investing) and the management of the company’s capital structure (financing). A higher ratio indicates a strong operational performance where the cash generated from operations exceeds the cash being used for investment and financing purposes, suggesting a healthier financial position. In contrast, the other options either narrow the focus too specifically or provide alternative perspectives not directly addressing the comprehensive nature of evaluating operational cash flow against the outflows stemming from both investment and financing activities. Hence, the context of the question aligns effectively with the chosen formulation.