Question

"Cash is king," but is that the whole story?

Ch. 5 discusses the importance of cash flow in the operation of a successful business. Drawing from your professional or personal experience, or from your research skills (researching news articles or publicly traded companies' corporate annual reports), explain a situation in which a profitable organization had negative cash flows or when an organization experiencing a loss had positive cash flow.

Answer 1

For the given question we need to write

1. Reasons for negative cash flows for a profitable organisation.

2. Reasons for positive cashflows for a loss making organisation

1. Reasons for negative cash flows for a profitable organisation.

A. Organisation having huge sales but all the cells are based on credit sales. In that case there will be a high sales revenue will be recorded at the time of sale but the cash was received after the expiry of credit period.

Till expiry of credit period there will be no cash flows to the organisation but in the books of accounts we can see that organisation is a profit making organisation.

2. Reasons for positive cashflows for a loss making organisation.

A. Explanation of the situation can be done through an example

Organisation which has a huge fixed assets like plant and machinery charges huge depreciation on those plant and machineries.

If the sales made by the organisation on cash basis is not equals to the depreciation expense (which is a non cash expense, due to this expense no cash outflows will be done) then that organisation has positive cash flows through sales but still in reporting it is a loss making organisation.

These are the situations where negative cash flows for a profit making organisation and positive cash flows for a loss making organisation.

These are all the information required to solve the given question.

I hope, all the above mentioned information and explanations are useful and helpful to you.

Thank you.