Explain why accounting profits and cash flows, Financial Management

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Explain why accounting profits and cash flows are not the same thing.

Stock worth depends on future cash flows, their riskiness and their timing.  Profit calculations don't consider these three factors.  Profit as described in accounting, is simply the difference between sales expenses and revenue.  It is true that much profits are generally better than fewer profits, but when the chase of short-term profits adversely affects the size of future cash flows, their riskiness or their timing and then these profit maximization efforts are detrimental to the firm.

 


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