Question

suppose a friend of yours showed you the pro forma income statements for his startup and exclaimed excitedly that during its first three years of operation, his firm will make a net income of $150,000 per year, which is just the amount of money, $450,000, that the firm will need to pay off a three-year loan. explain to your friend why he might not actually have $450,000 in cash, even though his pro forma income statements say that he will earn that amount of money.

Answer 1

Income Statement does not constitute cashflow therefore the 150,000 earnings aren't always the similar of 150,000 cash.

Even as there could be accounting incomes of 150,000 our pal must examine the cashflow declaration to test for the liquidity of his enterprise.

For example, purchases if the enterprise buys for 10,000 and sale for 15,000 an advantage could be identified for 5,000

however, It will  buy inventory once more o refill its stock if it used the complete quantity to buy a further 15,000 stock

His profits will nonetheless be 5,000 however to be had coins to pay their loans could be zero.

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