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Questions and Answers
Which of the following statements is true?
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?
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?
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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