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Multiple Choice
Which of the following best measures how much cash a firm is generating through its operating activities?
A
Gross profit
B
Retained earnings
C
Net cash provided by operating activities
D
Net sales
Verified step by step guidance
1
Understand the concept of 'Net cash provided by operating activities': This metric is derived from the cash flow statement and represents the cash generated or used by a firm's core business operations during a specific period.
Recognize why 'Gross profit' is not the correct measure: Gross profit is calculated as revenue minus the cost of goods sold (COGS) and does not account for cash flow or operating activities directly.
Understand why 'Retained earnings' is not the correct measure: Retained earnings represent the cumulative net income that has been reinvested in the business, but it does not specifically measure cash flow from operations.
Clarify why 'Net sales' is not the correct measure: Net sales represent total revenue minus returns, allowances, and discounts, but it does not reflect cash flow or operating activities.
Conclude that 'Net cash provided by operating activities' is the best measure: This figure directly reflects the cash generated from a firm's operating activities, excluding financing and investing activities, making it the most accurate indicator of operational cash flow.