Which of the Following Statements Is CORRECT

question 93

Multiple Choice

Which of the following statements is CORRECT?

• A) An increase in accounts receivable is added to net income in the operating activities section because if accounts receivable increase, then when they are collected cash will come into the firm.
• B) In finance, we are generally more interested in cash flows than in accounting profits. Free cash flow (FCF) is calculated as after-tax operating income plus depreciation less the sum of capital expenditures and net operating working capital. Free cash flow is the amount of cash that could be withdrawn without harming the firm's ability to operate and to produce future cash flows.
• C) The first major section of a typical statement of cash flows is "Operating Activities," and the first entry in this section is "Net Income." Then, also in the first section, we show some items that add to or subtract from cash, and the last entry is called "Net Cash Provided by Operating Activities." This number can be either positive or negative, but if it is negative, the firm is almost certain to soon go bankrupt.
• D) The next-to-last line on the income statement shows the firm's earnings, while the last line shows the dividends the company paid. Therefore, the dividends are frequently called "the bottom line."
• E) Most rapidly growing companies have positive free cash flows because cash flows from existing operations will exceed fixed assets and working capital needed to support the growth.

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Definitions:

Gross Profit

The difference between sales revenue and the cost of goods sold, indicating the financial health of a company's core business activities.

Gross Profit Margin

A financial metric that measures the proportion of money left over from revenues after accounting for the cost of goods sold, expressed as a percentage.

Multiple-Step Statement

An income statement that shows numerous steps to arrive at net income, including gross profit, operating income, and other income and expenses.

Single-Step Statement

An income statement format that calculates net income or loss using a single subtraction of total expenses from total revenues.