Which of the following statements is most correct?
A) Cash flows and accounting profit are not at all related since no common elements are used in the calculation of either individual measure.
B) Accounting profits are more important than free cash flow.
C) High inflation can seriously distort firms' balance sheets, and since inflation also affects depreciation and inventory costs, profits can also be affected.
D) When an action is taken at one point in time, but its full effects cannot be accurately measured until later, this has the potential to affect the firm's financial statements. However, as long as the firm keeps the same standard accounting period this timing problem can be avoided.
E) None of the statements above is correct.

Question

Quizplus · Accepted Answer

High inflation can seriously distort firms' balance sheets and also affect depreciation and inventory costs, which can lead to a distortion of profits. Option A is incorrect since cash flows and accounting profit are related as both measures use the same elements of revenue and expenses. Option B is incorrect since free cash flow is a crucial measure that indicates a firm's ability to reinvest in the business or return capital to shareholders. Option D is incorrect as the timing problem cannot be completely avoided, and the firm may need to adjust its accounting period or use alternative accounting methods to account for the effects.

Which of the Following Statements Is Most Correct