"Profit Is a Poor Substitute for Cash Flow

question 16

Multiple Choice

"Profit is a poor substitute for cash flow." Which two of the following examples accurately apply to that statement?

• A) Profit only affects incremental aspects of cash flow.
• B) Profit rather than cash flow is crucial for long term increases in investor value.
• C) Working capital adjustments may be needed to modify the profit figures for NPV analysis.
• D) Depreciation is not a cash flow and should be excluded.

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Definitions:

APC

In economics, stands for Average Propensity to Consume, which is the ratio of total consumption to total disposable income.

APC

Average Propensity to Consume, which is the fraction of income that households spend on consumption as opposed to saving.

APS

Stands for Average Propensity to Save, which measures the proportion of income that households save rather than spend on goods and services.

Autonomous Consumption

The level of consumption that occurs when income is zero, representing the consuming behavior independent of current income.