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