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    Question

    A firm has increasing profits but declining cash flows.

    The management claims business is doing well. What should an analyst examine to validate the claim?
    A Shareholder equity trends Correct Answer Incorrect Answer
    B Profit and loss appropriation account Correct Answer Incorrect Answer
    C Cash flow from operating activities Correct Answer Incorrect Answer
    D Changes in EPS Correct Answer Incorrect Answer

    Solution

    High profits with falling operating cash flow may indicate aggressive revenue recognition, excessive working capital blockage, or manipulation. Analysts rely on CFO to assess real liquidity.

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