1. The rule-of-thumb in evaluating the cash flows of an organization is:
The cash flows from operations should be positive, and increasing each year, and ideally should be sufficient to cover any negative cash flows from investing activities.
How would you evaluate China Trade in terms of cash flows, in light of this rule-of-thumb measure?
2. China Trade‘s income statement (after adjusting for depreciation expense and adjusting entries) shows net income of $300. Yet, its cash flows from operations were a negative $3,000. What caused a $300 accrual basis profit to become a $3,000 “loss” in terms of cash flows from operations?
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