Week 07 Discussion – The Importance of Cash Flow Information

Week 07 Discussion – The Importance of Cash Flow Information:

For many years up through the mid-1970’s, there existed a nation-wide chain of retail stores by the name of “W.T. Grant & Co.”. These stores often served as one of the “flagship” stores in shopping malls. W.T. Grant & Co. filed for Chapter 7 bankruptcy. This means that the company was liquidated and went out of business. You will not find a W.T. Grant store in existence today. Interestingly, if we were to examine the income statement of that company for each of the last few years of its existence, we’d find that the company was profitable. Its revenues exceeded its expenses, and the company thus reported a “net income” (as opposed to a net loss).

How is it possible that a company can be profitable and yet find it necessary to completely liquidate its operations and cease to exist? (HINT: The cash flow statement was not one of the required financial statements during that era. If it had been required, consumers and investors might not have been quite so surprised by the company’s Chapter 7 filing).

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