Profitable and growing firms may run short on cash because:

Question

Quizplus · Accepted Answer

Profitable and growing firms may experience spontaneous increases in receivables and inventories due to increasing sales volume and expansion of the business, which can tie up cash and create a short-term cash flow issue. Option A is incorrect because a rapid decrease in accounts receivables would increase cash, not deplete it. Option B is incorrect because the growth in accruals does not directly impact cash flow. Option C is incorrect because rapid growth in accounts payable can actually benefit cash flow by providing a longer time frame to pay off obligations.

Profitable and Growing Firms May Run Short on Cash Because