In reviewing the financial statements of NanoTech Co., you discover that net income increased while operating cash flows decreased for the most recent two consecutive years. Required: a. Explain how net income could increase for NanoTech while its operating cash flows decrease. Your answer should include three illustrative examples. b. Describe how operating cash flows can serve as one indicator of earnings quality.

In reviewing the financial statements of NanoTech Co., you discover that net income increased while operating cash flows decreased for the most recent two consecutive years. Required: a. Explain how net income could increase for NanoTech while its operating cash flows decrease. Your answer should include three illustrative examples. b. Describe how operating cash flows can serve as one indicator of earnings quality.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter3: Analysis Of Financial Statements

Section: Chapter Questions

Problem 15SP

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Question

Please answer Exercise 7-10 a, b, and c.

EXERCISE 7-10
Linking Operating
Cash Flows with
Earnings Quality
10-1
In reviewing the financial statements of NanoTech Co., you discover that net income increased
while operating cash flows decreased for the most recent two consecutive years.
Required:
a. Explain how net income could increase for NanoTech while its operating cash flows decrease. Your answer
should include three illustrative examples.
b. Describe how operating cash flows can serve as one indicator of earnings quality.
(CFA Adapted)

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