Audit and Assurance Practice Exam

Which of the following does not typically represent a likely expected relationship for cash accounts?

1. Declining operating cash flows despite consistent profits

2. Increasing cash flow from financing activities

3. Consistent increases in cash balances

4. Reduction in accounts payable

The correct answer is: Declining operating cash flows despite consistent profits

The statement regarding declining operating cash flows despite consistent profits stands out as an atypical relationship for cash accounts. In a healthy financial environment, consistent profits are generally expected to correlate with positive operating cash flows. This is because profits usually translate into cash received from sales. If a company is reporting profits but experiencing declining operating cash flows, it may indicate issues, such as revenue recognition practices, high non-cash revenues, or increased working capital requirements that drain cash. The other relationships mentioned tend to be more typical. An increase in cash flow from financing activities implies that the company is either borrowing funds or raising equity, which could positively influence the cash balance. Consistent increases in cash balances indicate a healthy accumulation of cash, often reflecting successful business operations or prudent cash management. A reduction in accounts payable suggests that a company is paying off its debts, which, while potentially decreasing cash temporarily, indicates a commitment to managing liabilities effectively. Thus, option A accurately reflects a scenario that deviates from traditional expectations regarding cash flow relationships in financial statements.