Question #52
Reading: Reading 12 Evaluating Quality of Financial Reports
PDF File: Reading 12 Evaluating Quality of Financial Reports.pdf
Page: 48
Status: Correct
Correct Answer: A
Question
Which of the following statements about operating income and operating cash flow is most accurate?
Answer Choices:
A. Operating income is confirmed by operating cash flow when the growth rates of the two measures are relatively stable over time
B. Operating cash flow usually increases faster than operating income when the firm is growing
C. Operating income is more reliable than operating cash flow because of the judgments and estimates involved with accrual accounting
Explanation
When the growth rates of operating income and operating cash flow are stable over time,
operating income is being confirmed by operating cash flow. Operating cash flow is more
reliable than operating income. During growth, operating cash flow is usually lower than
operating income as the firm uses cash to increase inventories and receivables.