Which of the following statements is TRUE?Income statements are good approximations of a firm's cash...

Which of the following statements is TRUE?

Income statements are good approximations of a firm's cash flow since they exclude any non-cash expenses.

A company’s operations and finances should be planned independently of each other.

All else same, the longer a firm's cash conversion cycle, the higher is its net working capital need.

A positive net earnings amount on the income statement will indicate that the firm will have sufficient cash to meet its obligations.

Solutions

Expert Solution

Option C is correct

The statement 'All else same, the longer a firm's cash conversion cycle, the higher is its net working capital need' is TRUE

If the cash conversion cycle is longer, then it means that it takes a longer time for the company to convert its current assets into cash. If it takes longer to get cash, then to carry out the business operations, the firm will need a higher working capital.

Options A and D are incorrect because income statement contains non-cash expenses such as depreciation and as such they are not a good approximations of firm's free cash flow and the positive net income may not be sufficient to meet cash obligations.

Option B is incorrect because A company’s operations and finances are dependent to each other and they should be planned together.

jeff jeffy answered 2 years ago

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