An institutional credit analyst is evaluating a fast-growing technology firm. The firm's income statement shows record-high net income, but the firm recently drew heavily on its emergency credit line to meet payroll. Which of the following best explains why the statement of cash flows is essential to identify this discrepancy?

Question

Accepted Answer

Under the accrual basis of accounting, revenues are recorded when earned and expenses when incurred, regardless of cash movement. The statement of cash flows strips away these accrual timing differences to answer whether the company is actually generating spendable cash.

Discussion