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Hello sir
1) can you explain how a negative cash flow contribute to a business risk?
2) can a negative cash flow be a source of material misstatement?if yes….why or how?
Thank you
“1) can you explain how a negative cash flow contribute to a business risk?”
This was a question that should have been asked back in 1971 when Rolls Royce reported record profits but had a negative cash flow – pumped masses of cash into the RB211 engine project and capitalised it under development expenditure
The project failed at the final test stage and Rolls Royce were in liquidation 6 months after their record profit-making year
How can negative cash flow contribute to business risk? How long will you personally survive if every month you manage to spend 10% more than you earn?
“2) can a negative cash flow be a source of material misstatement?if yes….why or how?”
Not sure that negative cash flow can be a “source” of material misstatement but I think my answer to part 1 of your question shows how the two can be linked.
Yet, in the Rolls Royce example, the negative cash flow was not a “source” of the problems
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