The statement of cash flows should NOT be used to evaluate an entity's ability to: a. pay...

Question:

The statement of cash flows should NOT be used to evaluate an entity's ability to:

a. pay dividends

b. earn net income

c. meet obligations

d. generate future cash flows

The Cash Flow Statement:

In the cash flow statement, the cash inflows and outflows of a company are presented and the difference between the net income for the period and the net cash increase in the period reconciled.

Answer and Explanation:


Let us look at the alternatives:

a. pay dividends The cash flow statement will indicate the ability of a company to convert profits into cash flow, so reasonable assumptions can be made about its ability to pay dividends
b. earn net income No, the income statement should be used to evaluate this.
c. meet obligations The cash flow statement will indicate the cash available to settle debts
d. generate future cash flows If the cash flow statements for a few periods are compared, reasonable assumptions can be made about the future ability to generate cash flow.

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Using the Statement of Cash Flows for Decision Making

from Accounting 101: Financial Accounting

Chapter 12 / Lesson 5
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