Question #42
Reading: Reading 12 Evaluating Quality of Financial Reports
PDF File: Reading 12 Evaluating Quality of Financial Reports.pdf
Page: 37
Status: Incorrect
Correct Answer: B
Your Answer: B
Question
Which of the following statements about operating income and operating cash flow are correct or incorrect? Statement #1: If operating income is growing faster than operating cash flow over the long-term, the firm may be recognizing revenue too soon or delaying the recognition of expense. Statement #2: Operating cash flow exceeding operating income is sustainable over the long-term.
Answer Choices:
A. Both are incorrect
B. Only one is correct
C. Both are correct
Explanation
Statement #1 is correct. If operating income and operating cash flow are growing at
different rates over the long-term, the firm may be engaging in earnings manipulation.
Statement #2 is incorrect. Over the long-term, operating cash flow will eventually decline
without the support of operating income.