Cash sources, retained earnings and cash shortages
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a. If you could pick a single source of cash for your business, what would it be? Why?
b. How can a business earn large profits but have a small balance in Retained Earnings?
c. How can a business lose money for many years and still have plenty cash?
d. Give two reasons why a business can be profitable for many years and still have a cash shortage?
e. Suppose your business has $80,000 worth of liabilities that must be paid within the next three months. Your liquid (can be turned into cash quickly) assets total only $60,000, your sales and collections from customers are slow. Identify two ways to finance the remaining $20,000 you will need, so you can pay all of the liabilities when they are due.
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This solution provides answers to various accounting questions.
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ANSWERS
Question A
It would be sales. Selling is a regular activity of the company and sourcing cash directly from sales rather than from accounts receivable is sustainable.
Question B
Businesses can earn large profits, but still record small balances in their retained ...
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