Cash flow from operations that are consistently lower than net income may imply that:
A) a dividend has not been issued in a long time.
B) the common stock should be split.
C) the company may be facing a cash shortage.
D) working capital has decreased.

Question

Quizplus · Accepted Answer

When the cash flow from operations consistently lags behind the net income, it indicates that the company may be facing a cash crunch. This could be due to various reasons, such as high levels of debt, excessive inventory, or inefficient management of working capital. It is essential for a company to generate sufficient cash flow from its core operations to meet its immediate obligations and fund its growth plans. Therefore, investors should closely monitor the trend of cash flow from operations and compare it with net income to assess the company's financial health. A low cash flow from operations relative to net income could result in difficulties in maintaining dividends, splitting stocks or other growth initiatives.

Cash Flow from Operations That Are Consistently Lower Than Net