Question

Jose is analyzing the financial statements of two companies. The first company has a net income that is significantly higher than their cash flows provided by operating activities, whereas the second company has net income and cash flows provided by operating activities that are very similar. What can Jose assume about these two companies?

A) The first company is in the introductory phase of the corporate life cycle, whereas the second company is in the growth phase of the corporate life cycle.
B) The first company is in the decline phase of the corporate life cycle, whereas the second company is in the growth phase of the corporate life cycle.
C) The first company is in the maturity phase of the corporate life cycle, whereas the second company is in the decline phase of the corporate life cycle.
D) The first company is in the growth phase of the corporate life cycle, whereas the second company is in the maturity phase of the corporate life cycle.

Answer 1

The first company is in the introductory phase of the corporate life cycle, whereas the second company is in the growth phase of the corporate life cycle.

Step-by-step explanation:

When analyzing the financial statements of two companies, Jose can assume that the first company with significantly higher net income than cash flows provided by operating activities is in the introductory phase of the corporate life cycle, whereas the second company with similar net income and cash flows provided by operating activities is in the growth phase of the corporate life cycle.

This is because during the introductory phase, a company may be investing heavily in research and development or marketing and advertising, resulting in high net income but lower cash flows. In the growth phase, the company's operations are more stable, leading to similar levels of net income and cash flows provided by operating activities.