PrepTest 120, Section 1, Question 11
In contemplating major purchases, businesses often consider only(51 more words not shown)
Which one of the following,(6 more words not shown)
- AOnly a cash-flow(7 more words not shown)
- BAny business that(11 more words not shown)
- CWhen a business(10 more words not shown)
- DA cash-flow statement(15 more words not shown)
- EWhen a business(14 more words not shown)
Reading the argument
A business might have enough money left this month to buy a $5,000 printer. That doesn't settle whether it can really afford the purchase. What happens when the annual software bill arrives? That's the problem the author identifies. Some expenses don't occur every month, so a business that only looks at monthly bills might spend money it will need later. I agree that the business should look beyond this month's regular expenses.
What we’re looking for
Then the author introduces a cash-flow statement as critical for every business. Does that statement actually include the expenses we've been missing? The passage hasn't told us what it does. We shouldn't fill in the answer just because the term sounds financially responsible. For a strengthener, connect the proposed tool with the problem. Show that a cash-flow statement accounts for the nonmonthly expenses as well as the monthly ones. That would explain why using it helps a business avoid the mistake the author described.
Working the answers
- A
All monthly expenses still leaves out expenses that aren't monthly. This says a cash-flow statement is uniquely good at documenting the category we already consider. It doesn't establish that the statement includes the annual software bill or other irregular costs that create the problem.
- B
A business that has already overexpanded might benefit from a cash-flow statement, but we don't learn how the statement addresses the omitted expenses. This offers some support for using it in a particular situation, not the direct explanation for why all businesses need it that D provides.
- C
Restricting the revenue calculation to monthly revenue doesn't tell us how a cash-flow statement would fix the expense calculation. The argument's missing connection is between the proposed statement and the nonmonthly expenses, not between two existing accounting habits.
- DCorrect
The statement tracks both kinds of expenses, including the ones the author says businesses can overlook. And D goes further than our initial prediction: it says this is the only way to track both. That gives the claim that the tool is critical a much stronger basis. To account for the full set of expenses and avoid the identified risk, businesses would need this tool.
- E
This supports the value of considering all expenses. We already had a reason for doing that: ignoring some expenses can lead to overexpansion. The missing step is why a cash-flow statement is needed to accomplish it. E doesn't mention what the statement does or connect it with those better decisions.
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