Linh Do Accounting Services reported income (profits) of $150 000 for 2022, but its cash balance decreased $40 000. Which financial statement should Linh Do Accounting Services' management refer to for an explanation of this situation?

Question

Linh Do Accounting Services  reported income (profits) of $150 000 for 2022, but its cash balance decreased $40 000. Which financial statement should Linh Do Accounting Services' management refer to for an explanation of this situation?

BlackTom AI · Accepted Answer

The question asks which financial statement management should consult to explain why profits did not align with the cash balance.
Option 1: Statement of cash flows. This is the correct choice because the cash flow statement reconciles net income to cash provided by operating activities, and also shows cash movements from investing and financing activities. It explains why cash decreased by $40,000 despite a $150,000 profit, accounting for non-cash expenses, changes in working capital, and cash inflows/outflows from other activities.
Option 2: Statement of Income. While it reports profit, it is based on accrual accounting and does not reflect actual cash receipts and payments. Therefore, it cannot explain a cash decline when net income is positive, making this option insufficient for understanding the discrepancy.
Option 3: Statement of changes in equity. This statement tracks changes in owners’ equity accounts (like retained earnings, paid-in capital) over the period. It shows how equity evolves but does not detail cash inflows and outflows or the cash position, so it won’t explain the cash decrease.
Option 4: Statement of financial position. Also known as the balance sheet, it shows assets, liabilities, and equity at a specific date. It reflects the cash balance but does not explain the flows that caused the change over the period. Hence, it’s not the primary instrument for reconciling cash with profit.
In summary, the cash flow statement is the appropriate tool to explain the relationship between reported profits and actual cash movements, including why cash declined despite positive earnings.

BACC012 Week 7: Practice Quiz

Linh Do Accounting Services reported income (profits) of $150 000 for 2022, but its cash balance decreased $40 000. Which financial statement should Linh Do Accounting Services' management refer to for an explanation of this situation?

View Explanation

Log in for full answers

Similar Questions

When preparing the statement of cash flows using the indirect method (U.S. GAAP), the current portion of long-term debt would appear

Which of the following statements is false?

Why is the operating activities section of the statement of cash flows often believed to be the most important part of the statement?

On the statement of cash flows (indirect method), the loss on the sale of an office building by Apple Inc. can be found in the

Which of the following is not disclosed in a statement of cash flows using the direct method?

In a statement of cash flows, interest paid to creditors is classified as a cash flow from:

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler