Cash Flow vs Profit

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Questions and Answers

Which of the following statements is true?

  • A company can be profitable even with negative cash flows. (correct)
  • Expenses are always paid for before being accounted for.
  • Revenue and cash flow are always earned and received simultaneously.
  • A company's profits are always based on cash received

What is the purpose of depreciation?

  • To spread the cost of a long-term asset over its useful life (correct)
  • To increase a company's profits
  • To increase a company's net cash flow
  • To decrease a company's expenses

Why is cash flow critical to a company's survival?

  • To pay for expenses before they are incurred
  • To increase a company's profits
  • To keep the company operating (correct)
  • To generate revenue from sales

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Study Notes

  • The income statement shows profit, but not net cash flow.
  • Revenue is earned when a sale is identified, but cash flow may come later.
  • Expenses may be accounted for without being paid or paid for before being incurred.
  • Profits are measured on an accrual basis, not based on cash received.
  • Long-term assets are expensed over their useful life through depreciation.
  • A company must generate cash to keep operating, not just profits.
  • A company can be profitable but have negative cash flows.
  • A company cannot survive long with negative cash flows.
  • Negative cash flows can cause a company to become bankrupt.
  • Cash flow is critical to a company's survival.

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