Our Gang Transfer Company has shown consistent profits over the past five years.However,the company has recently found itself in financial trouble due to cash shortages.This indicates that:
A)an accounting profit does not guarantee a positive cash flow.
B)the state of the economy is less important than financial control techniques.
C)the accountants apparently made a mistake when they prepared the trial balance.
D)it's not always important to prepare financial statements.

Question

Quizplus · Accepted Answer

An accounting profit, which refers to the profit reported on the income statement, does not necessarily equate to a positive cash flow. Profit does not take into account the timing of cash inflows and outflows, which can result in cash shortages despite apparent profits.

Our Gang Transfer Company Has Shown Consistent Profits Over the Past