ACCA Financial Management (F9) Certification Practice Exam

What might be a primary reason for a company to engage in a sale and leaseback transaction?

1. To maximize asset ownership

2. To improve cash flow by accessing immediate funds

3. To reduce operational costs

4. To enhance employee morale

The correct answer is: To improve cash flow by accessing immediate funds

A sale and leaseback transaction primarily involves selling an asset, such as equipment or property, and then leasing it back from the buyer. This strategy enables a company to improve its cash flow by accessing immediate funds from the sale. When a company sells its asset, it receives a lump sum of cash which can be used for various purposes such as reinvestment in the business, paying down debt, or covering operational expenses. The lease agreement that follows allows the company to retain the use of the asset while avoiding the financial burdens of ownership. This approach can significantly enhance liquidity, making it a strategic move for firms looking to strengthen their financial position in the short term. The other options, while they may have some relevance in specific contexts, do not address the primary function of this financial maneuver. For instance, maximizing asset ownership runs contrary to the nature of a sale and leaseback; the company relinquishes ownership to access liquidity. Similarly, while reducing operational costs and enhancing employee morale are important business objectives, they are not the direct outcomes of a sale and leaseback strategy. The core focus is indeed on the immediate financial benefit and improved cash flow.