Which of the following statements is correct?
A) The bottom line on the statement of cash flows equals the change in the retained earnings on the balance sheet.
B) The reason the statement of cash flows is important is because cash is what pays the firm's obligations, not accounting profit.
C) If a firm has accounting profit, its cash account will always increase.
D) All of these choices are correct.

Question

Quizplus · Accepted Answer

The statement of cash flows is crucial because it shows how a company generates and uses cash, which is vital for meeting obligations, paying for investments, and returning money to shareholders. Unlike accounting profit, which includes non-cash revenues and expenses, cash flow provides a clear picture of the company's liquidity and financial health. Choices A and C are incorrect because the bottom line of the statement of cash flows shows the net increase or decrease in cash and cash equivalents, not the change in retained earnings, and having an accounting profit does not guarantee an increase in cash, as profits include non-cash items and do not account for cash outflows for investments or debt repayments.

Which of the Following Statements Is Correct