Question

Can a firm with positive net income run out of​ cash? Explain. ​(Select all the choices that​ apply.) A. A firm that has positive net income could never run out of cash. B. A firm can have positive net income but still run out of cash. C. For​ example, to expand its current​ production, a profitable company may spend more on investment activities than it generates from operating activities and financing activities. Net cash flow for that period would be​ negative, although its net income is positive. D. It could also run out of cash if it spends a lot on financing​ activities, perhaps by paying off maturing​ long-term debt, repurchasing​ shares, or paying dividends.

Answer 1

Answer:

Correct statements are:

B, C and D

Explanation:

A firm with positive net income can anytime run out of cash as the accounting net income is computed on accrual basis, and it is not necessary that all the related cash is collected.

Also the firm might spend a huge amount on investing in small companies, capital properties etc: which will again lead to huge cash outflow.

Financing activities generally bring the cash in the company, whereas after the financing instruments are matured, they need to be paid off. In that case, in year of maturity the entire amount will be paid which will involve huge cash outflow, and the company might run out of cash.

Therefore, all the statements except Statement A are correct.

Correct Statement are:

B, C and D