Question

Profits provide assurance that cash flow will be sufficient to maintain solvency. The cash flows generated in a given time period are equal to the ________.

1) Net income
2) Operating expenses
3) Accounts receivable
4) Depreciation

Answer 1

The cash flows in a given time period equate to the net income, which is what remains after all expenses are deducted. Profits are reinvested to grow the business, but firms may need to borrow when profits are insufficient.

Step-by-step explanation:

The cash flows generated in a given time period are equal to the net income. This net income is the true reflection of a company's profitability during that period, after all expenses, including operating expenses and depreciation, have been deducted from revenues.

Profits, which are essential for solvency, can be reinvested to help a business grow by improving facilities, hiring additional labor, or purchasing advanced technology, thereby generating a larger cash flow in future sales periods. While reinvestment from profits is vital for growth, firms must also secure additional financial capital through sources like borrowing from banks and issuing bonds, especially when profits are low or during losses to ensure continuous investments.