Question

Why has cash flow from operations become increasingly important as an analytical tool?

(a) Inflation has distorted the meaningfulness of net income.
(b) high interest rates can put the cost of borrowing to cover short-term cash needs out of reach for many firms.
(c) Firms may have uncollected accounts receivable and unsalable inventory on the books.
(d) All of the above.

Answer 1

The correct option is (d) All of the above.Cash flow from operations is essential due to the distortion of net income by inflation, high interest rates affecting borrowing costs, and the existence of uncollected receivables and unsalable inventory.

Step-by-step explanation:

Cash flow from operations has become an increasingly important analytical tool because it provides a more realistic view of a company's financial health. Inflation can distort the meaningfulness of net income by eroding the real value of revenue over time.

Consequently, companies might engage in strategies such as delaying payments and accelerating revenue collection, potentially detracting from focusing on improving products and services. High interest rates can also make borrowing to cover short-term cash needs expensive. Moreover, firms may have uncollected accounts receivable and unsalable inventory, which can overstate financial performance if only looking at net income.

Therefore, all the aforementioned factors (a, b, and c) make cash flow from operations a critical measure. The correct option is (d) All of the above.