For many years up through the mid-1970's, there existed a nation-wide chain of retail stores by the...

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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).
	
Document Preview: 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).

Robert · Accepted Answer

QUESTION: 
How is it possible that a company can be profitable and yet find it necessary to completely 
liquidate its operations and cease to exist? 
SOLUTION: 
Cash Flow Statement is one of the financial statements which are prepared to evaluate the 
liquidity position of the company. The need for external financing, ability of the company to 
meet its obligations, ability to pay dividends can be analyzed from cash flow statements. It 
basically shows the cash flows generated by the company from all the sources namely, operating, 
investing and financing. It taken into account only those transactions in which the cash is 
actually received or paid out i.e. it follows cash basis of accounting. 
The income statement measures the performance of the company over a predefined accounting 
period. The financial performance is evaluated by summarizing the revenues earned by the 
business and expenses incurred by the business.

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...

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