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Which of the following statements is true?For an entity to survive, the net cash flow from operating activities should be positive.For an entity to survive, the net cash flow from investing activities should be positive.For an entity to survive, the net cash flow from financing activities should be positive.For an entity to survive, the net cash flow from operating activities should be negative.

Question

Which of the following statements is true?For an entity to survive, the net cash flow from operating activities should be positive.For an entity to survive, the net cash flow from investing activities should be positive.For an entity to survive, the net cash flow from financing activities should be positive.For an entity to survive, the net cash flow from operating activities should be negative.

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Solution

The statement that is true is: "For an entity to survive, the net cash flow from operating activities should be positive."

Here's why:

  1. "For an entity to survive, the net cash flow from operating activities should be positive." - This is true. Positive cash flow from operating activities indicates that the entity is generating more cash than it is spending on its day-to-day operations. This is crucial for the survival of the entity as it ensures that the entity has enough cash to meet its short-term liabilities and operating expenses.

  2. "For an entity to survive, the net cash flow from investing activities should be positive." - This is not necessarily true. Investing activities often result in negative cash flow because they involve spending cash on long-term assets that will generate returns in the future. While positive cash flow from investing activities can be beneficial, it is not essential for the survival of the entity.

  3. "For an entity to survive, the net cash flow from financing activities should be positive." - This is not necessarily true. Financing activities involve raising capital or repaying debt. While positive cash flow from financing activities can provide additional funds for the entity, it is not essential for survival.

  4. "For an entity to survive, the net cash flow from operating activities should be negative." - This is not true. Negative cash flow from operating activities indicates that the entity is spending more cash on its day-to-day operations than it is generating. This could lead to cash shortages and financial difficulties, threatening the survival of the entity.

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