Tutorial 7 - Problem 7
Tutorial 7 - Problem 7
Tutorial 7 - Problem 7
Cash flows from operations concern about cash movement (cash inflows and outflows)
from a business operation while net income is net profit (revenues in excess of expenses)
reported in bottom line of income statement. Cash flows applies cash accounting whereas
net income is accrual adjusted. Net income reflects a business’s financial performance
whereas cash flows from operations tell stakeholders business liquidity and flexibility.
Net income manipulation is slightly easier than cash flow manipulation because cash
transactions can be traced and time stamped while some net income transactions can be
arbitrary.
Option 1: Borrow from bank, provided the company has good operating history.
Option 2: Tighten collection policy to accelerate cash collection from customers.
Option 3: Issue new stocks to obtain equity financing from shareholders.
Option 4: Reduce unnecessary expenses and monitor expenditure to have cash flexibility.
Option 5: Issue corporate bonds to obtain debt financing from bondholders.