Which of the following statements about operating income and operating cash flow are correct or incorrect?
Statement #1:
If operating income is growing faster than operating cash flow over the long-term, the firm may be recognizing revenue too soon or delaying the recognition of expense.
Statement #2:
Operating cash flow exceeding operating income is sustainable over the long-term.
A. Both are correct. B. Only one is correct. C. Both are incorrect.
Statement #1 is correct. If operating income and operating cash flow are growing at different rates over the long-term, the firm may be engaging in earnings manipulation. Statement #2 is incorrect. Over the long-term, operating cash flow will eventually decline without the support of operating income.
