Can an organization have net income yet still show a decrease in its cash balance? Why...
- Can an organization have net income yet still show a decrease in its cash balance? Why might this occur? Provide at least two examples of situations that would cause this to happen.
Homework Answers
Solution:
Yes, an organization can have net income yet still show a decrease in its cash balance, this might occur due to following reasons:
1. Organization is providing long credit period to its customer. In such situation, we recognized revenue in the income statement on the basis of credit sales but same is converted in to cash. In such situation organization have net income yet still show a decrease in its cash balance.
2. Another example is capital expenditure, Though organization earned net income during the year, however available cash is invested in fixed assets, therefore it may result in decrease in cash balance.
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