The most likely situation in which reported earnings are positive but operations are consuming rather than generating cash would be a
A) rapidly growing company.
B) company reporting large noncash expenses.
C) company using very conservative accounting standards that lower earnings.
D) company paying large cash dividends to its shareholders.

Question

Quizplus · Accepted Answer

A rapidly growing company often invests heavily in operations and expansion, leading to high depreciation and other noncash expenses that can result in positive reported earnings but negative cash flow from operations. The company may be using cash to invest in growth opportunities rather than generating cash from current operations. Option B may also result in non-cash expenses affecting earnings, but it may not necessarily lead to negative cash flow from operations. Option C describes a situation where reported earnings are lower than actual earnings, leading to higher cash flow from operations. Option D implies that the company is paying out cash to its shareholders, reducing its cash balance but not necessarily indicating negative cash flow from operations.

The Most Likely Situation in Which Reported Earnings Are Positive