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    Managerial Accounting and Financial Statements

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    1. Financial Statements: Cash and Net Income:
    Traditional measures of financial and managerial accounting are often based on net income. However, net income is not the actual cash available to a given firm. As such, most bankrupt companies do not have sufficient liquidity (cash or assets easily convertible to cash) to cover pressing obligations. I need to know the relative importance of net income versus cash in the financial management of any company. Should I focus more on cash management? Why or why not.

    2. Contribution Margin vs. Gross Profit:
    Briefly outline the relative importance of Gross Profit on Sales and Contribution Margin used on financial statements.

    3. Pricing Decision:
    I understand that poor decision making may result when acceptable prices are determined by adding a fixed percentage to the "full cost" of a product when that "full cost" includes a unitized fixed cost. The lesson learned is that any selling price above the contribution margin will add to the wealth of the firm. This being the case, is there a danger in the decision rule that states "always accept any offer that has a positive contribution margin?" (I'm relating this question to the short term and long term profitability of the firm).

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    Solution Preview

    (1) Both are equally important and as you pointed out it may happen that you have a positive net income, yet a negative Cash and equivalents. They belong to different financial statements - net income to the Income Statement and Cash to Cash flow statement (in this context). Both should be used to get a full picture about a company's performance. Yet, between the two of them, Cash (on the cash flow statement) gives a better ...

    Solution Summary

    This response defines the concepts of cash and net income, cash management, gross profit, contribution margin, and pricing decisions.