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Why Caledonia Has to Adopt Free Cash Flows Approach and not Accounting Profit Approach?
Finance & Accounting
Pages 8 (2008 words)
Cash flows are the finances a corporation acquires from its daily sales and spends it in the operations of the business at that particular period. It is the liquidity position of the company and does not constitute for sales credit (Mulford & Comiskey, 2005).
Moreover, it involves financial instruments such as inventory, which the corporation can easily convert into money. The cash flow statement can highlight the economic position of the firm and its solvency capacity within that financial period. Alternatively, the accounting profits refer to the gain or loss of the investment of the entrepreneur after the accumulative revenues are subtracted from the expenses (Profit ? = Revenues – Expenses). In addition, the net income is for the whole year (Wayman, 2010). For most corporations, revenues are realized when the money is earned but not received. This means some items can be sold on credit and recorded on the Income Statement as sales even if the money is not actually received. Why Caledonia has to adopt free Cash flows approach and not Accounting profit approach According to Mulford & Comiskey (2005), both the cash flow methods and accounting profits are methods that corporations use to assess their economic performance. However, the concepts of computing these two formulas are different and constitutes of different elements. Cash flows have several qualities that make it preferable than the accounting profits. First, cash flows consider the time value of transactions and money, which is important for the business. ...
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