Which of the following statements about the cash flow statement is/are true?
I. The cash flow statement provides information on the liquidity of the firm.
II. The income statement is more susceptible to management manipulation than the cash flow statement.
III. The cash flow statement serves as a check on the inherent assumptions of the income statement.
IV. The cash flow statement is based on actual events while the income statement is based on the allocation of the effects of these events over time.
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A. B. C. D.Explanation
The cash flow statement cannot be manipulated as easily as the income statement since it is based on actual cash flows while income statement has to follow the accrual principle, which allocates non-cash expenses and revenues to the current and future periods, leaving open the avenue for earnings manipulation. For this reason, the cash flow statement acts as a check on the income statement.