When net income is high relative to operating cash flows,we describe the firm as having recorded:
A) income-decreasing accruals.
B) income-increasing accruals.
C) income-neutral accruals.
D) abnormal accruals.

Question

Quizplus · Accepted Answer

If net income is high relative to operating cash flows, it suggests that the firm has recorded income-increasing accruals. These accruals are non-cash transactions such as depreciation, accounts receivable, and accounts payable, which can affect net income but not operating cash flows. Therefore, a high net income relative to operating cash flows could be due to income-increasing accruals, indicating that the company's profits may not be sustainable in the long run.

When Net Income Is High Relative to Operating Cash Flows,we