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Summary QuestionWhy cannot a profitable company like Jackson repay its loan? In discussing this

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Why cannot a profitable company like Jackson repay its loa1QuestionWhy cannot a profitable company like Jackson repay its loan? In discussing this item, you may need to prepare a "Sources and Uses" statement (do not post this statement). Discuss your findings.Answer & ExplanationTo understand...

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  • October 13, 2024
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Question


Why cannot a profitable company like Jackson repay its loan? In discussing this

item, you may need to prepare a "Sources and Uses" statement (do not post this

statement). Discuss your findings.




Answer & Explanation


To understand why a profitable company like Jackson might be unable to repay

its loan, we need to consider several financial aspects beyond just profitability.

Profitability does not always equate to liquidity or the ability to meet short-term

obligations. Here are some potential reasons and considerations:


1. Cash Flow Issues:


o Operating Cash Flow: A company can be profitable on paper but

still face cash flow problems if it has high accounts receivable or

inventory levels that tie up cash.


o Non-Cash Expenses: Profits may include non-cash items like

depreciation, which do not affect cash flow.

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