Chapter 2, Problem 10CRCT

Summary Introduction

To critically think about: The reason why the stockholders’ may not suffer a loss despite the loss reported in the income statement.

Introduction:

The income statement indicates the performance of an organization for a short period. The net income of the company is positive if the net revenues exceed its expenses. It indicates a profit for the financial period. The net income will be negative if the expenses exceed the revenues. It indicates a loss for the financial period.

Write offs refer to the depreciation charged by the company. Depreciation refers to method of apportioning the cost of the asset over its beneficial life. If the assets are worth nothing in the open market, then the company will write off the complete acquisition cost of the asset. The write off will reduce the net income and can lead to a net loss if the write off is substantial.

Cash flow refers to the difference between the money that actually flows in and out of the company. Cash flow ignores noncash items like depreciation. Depreciation is just an accounting value, and the depreciation expense does not lead to any cash outflow. Hence, the cash flow records only those items that result in cash inflow or cash outflow.