Certified Valuation Analyst (CVA) Practice Exam

What role do debt repayments play in a company's cash flow?

1. They increase overall cash flow

2. They have no impact on cash flow

3. They reduce cash flow

4. They are considered operating income

The correct answer is: They reduce cash flow

Debt repayments play a significant role in influencing a company's cash flow, primarily by reducing it. When a company makes cash payments to service its debt, especially principal and interest on loans or bonds, this expenditure directly decreases the cash available for operational activities, investments, or other financial obligations. In terms of cash flow analysis, debt repayments are recorded as cash outflows in the financing section of the cash flow statement. This means that the money spent to pay off debt does not contribute to the cash available for the company's operations, future investments, or reserves. Therefore, companies must carefully manage their debt service obligations to maintain adequate cash flow for sustainable operations. Understanding the impact of debt repayments on cash flow is crucial for financial analysts and decision-makers as it affects liquidity, financial health, and the ability to invest in growth opportunities.