How can company make a net profit and still be short of cash

Assignment Help Financial Accounting

Reference no: EM133795585

Discussion Post: Income Statement

Your managers showed you the income statement for your company. The income statement shows a net profit margin of 5.4%, yet your manager says the company will need to borrow money to meet their financial obligations.

How is this possible? Address the following issues in your discussion:

1) How can a company make a net profit and still be short of cash?

2) In accrual accounting, we record sales when they occur, not when the cash is collected AND we record expenses when they occur, not when they are paid. How does this affect cash flow?

3) How does the purchase of fixed assets or additional inventory adversely affect cash flow? How would you 'mitigate' this impact?

Reference no: EM133795585

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