The earnings reported by a company can be very different from its cash flows. There are...
The earnings reported by a company can be very different from its cash flows. There are companies that report very large positive earnings while also generating large negative cash flows. Which of the following is most likely to create this phenomenon?
a. High capital expenditures, high depreciation, decreasing working capital
b. Low capital expenditures, high depreciation, decreasing working capital
c. High capital expenditures, low depreciation, increasing working capital
d. Low capital expenditures, low depreciation, decreasing working capital
e. Low capital expenditures, high depreciation, increasing working capital
Homework Answers
The answer is:
c. High capital expenditures, low depreciation, increasing working capital
Depreciation is a non cash expenditure but it is deducted while calculating profits and hence, low depreciation will lead to higher profits
Capital expenditures and working capital are not deducted from earnings but leads to outflow of cash and high investment in these leads to negative cash flow
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