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Questions Chapter 13 13-1. Distinguish between earnings and cash flows. Why is there a distinction between these two measures? Answer. Earnings consists of cash and noncash items; cash flows consists of only cash, and come from not only revenue, but also financing as well. Complicating earnings measurement are differences between accrual and cash accounting. Accrual accounting recognizes revenue when earned expenses when incurred, while cash accounting recognizes inflows and outflows of cash irrespective of whether cash …

…a business. Every company is subject to inherent risks, and management should not blindly pursue activities. Management's beliefs about the quality of its decisions are nearly always related to the normalcy, or lack thereof, of business conditions. This is evident in the management decision and analysis. Yet the best management anticipates the unexpected. In a competitive economy, normal conditions rarely prevail for any length of time. Management is paid to anticipate and expect the unusual.