A. While it is true that more inventory will be sold when sales increase, more inventory will also need to be manufactured or purchased, not only to replace the inventory that has been sold but also to have enough inventory on hand to support the increased sales. So the increased cash generated by increased inventory sales will be offset by the need to acquire more inventory.
B. The higher the firm's rate of growth in sales, the greater will be its need for additional financing. When sales increase, firms usually need to purchase more assets to support the increased level of sales. More inventory will need to be purchased, and additional equipment will be needed to expand manufacturing. Additional employees will be required to operate the new equipment and also to make and process the additional sales and to provide customer service after the sale. Some of the required funding can be provided by increases in profits and increases in accounts payable and accruals (called "spontaneous liabilities"); but not all of the required funding can be provided in that way. The company will need to raise additional external financing either in the form of borrowed funds or in the form of new equity.
C. Higher sales may lead to higher profits; but increased cash from higher profits is not the only effect the higher sales will have on cash.
D. A firm in a high-growth stage does not necessarily need to decrease its prices in order to keep sales growing, so this is an incorrect assumption.
