What is one reason a company may go bankrupt despite having a positive net income?

What is one reason a company may go bankrupt despite having a positive net income?

• A. Consistently increasing dividends
• B. Decreased revenue recognition
• C. Erosion of working capital due to increasing accounts receivable
• D. Lack of shareholder interest

Answer: (C)

A company can be in a situation where it has a positive net income but still faces bankruptcy due to issues related to cash flow and working capital management. When a company experiences an erosion of working capital because its accounts receivable are increasing, it implies that the business is not efficiently managing its collections. Even though the net income reflects profitability on an income statement, the cash flow statement may reveal a different reality. If a substantial amount of revenue has been recognized but not yet collected in cash, the company might struggle to meet its short-term obligations and operational expenses. Increased accounts receivable can indicate that customers are taking longer to pay their invoices, which can create cash flow problems. If the cash generated from operations does not cover the outflow required for debt repayment, operational costs, and other liabilities, this can lead to insolvency, hence the potential for bankruptcy despite showing a profit on paper.

A company can be in a situation where it has a positive net income but still faces bankruptcy due to issues related to cash flow and working capital management. When a company experiences an erosion of working capital because its accounts receivable are increasing, it implies that the business is not efficiently managing its collections.

Even though the net income reflects profitability on an income statement, the cash flow statement may reveal a different reality. If a substantial amount of revenue has been recognized but not yet collected in cash, the company might struggle to meet its short-term obligations and operational expenses.

Increased accounts receivable can indicate that customers are taking longer to pay their invoices, which can create cash flow problems. If the cash generated from operations does not cover the outflow required for debt repayment, operational costs, and other liabilities, this can lead to insolvency, hence the potential for bankruptcy despite showing a profit on paper.