Discuss How the Cash Flow Statement Helps Evaluate a Company's

question 31

Essay

Discuss how the cash flow statement helps evaluate a company's quality of earnings.

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Definitions:

Fixed Costs

Overheads that are unaffected by the quantity of output or sales, for example, tenancy costs, wages for staff, and indemnity expenses.

Contribution Format

A type of income statement presentation that separates fixed and variable costs, allowing for an easier assessment of how changes in volume affect profitability.

Contribution Format

A way of presenting income statements where variable costs are deducted from sales to find the contribution margin, then fixed costs are deducted to find net operating income.

Break-even Point

The level of production or sales at which total revenues equal total expenses, resulting in neither profit nor loss.