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Why does net profit fail to show how much cash a firm has?
ABecause profit is always paid out as dividends
BBecause profit is measured before any expenses
CBecause the income statement omits actual cash flows
DBecause taxes are recorded twice over the year
Answer & Solution
Correct answer: C. Because the income statement omits actual cash flows
1. Profit does not represent cash.
2. The income statement summarizes operating results over a period, and it does not present the actual cash flows of that period.
3. Those cash flows are summarized in the statement of cash flows instead.
4. Profit is struck after deducting expenses, so the claim that it is measured before expenses reverses the whole calculation.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 14 "Using Financial Information and Accounting", section 14.5 The Income Statement_
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