Which of the Following Statements Is Most Correct

question 37

Multiple Choice

Which of the following statements is most correct?

• A) Cash flows and accounting profit are not at all related since no common elements are used in the calculation of either individual measure.
• B) Accounting profits are more important than free cash flow.
• C) High inflation can seriously distort firms' balance sheets, and since inflation also affects depreciation and inventory costs, profits can also be affected.
• D) When an action is taken at one point in time, but its full effects cannot be accurately measured until later, this has the potential to affect the firm's financial statements. However, as long as the firm keeps the same standard accounting period this timing problem can be avoided.
• E) None of the statements above is correct.

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Definitions:

Internal Rate Of Return Method

A method of calculating the profitability of potential investments where the net present value of all cash flows equals zero.

Capital Budgeting

Capital Budgeting is the process by which organizations evaluate potential major projects or investments to determine their value and allocation of capital.

Allocated Fixed Costs

Fixed costs that are distributed among different departments or products based on prescribed criteria.

Direct Fixed Costs

Costs that relate specifically to a responsibility center and are incurred for the sole benefit of the center.