Question

How is it possible for a company to show positive net income but go bankrupt?

Answer 1

We derive positive net income through the process of accounting... Accounting involves posting of mere entries..and there is no yard stick to assess genuineness of the entries and accounting..what we wanted to happen..will happen...so overstating of assets and understating of liabilities is done to our favour...and also..net income involves only those affected in the current year...eg. company paid 1000crs to an Advertising agency...but of which 200 only amounts to current year.. here the outlay is 1000 but only 200 is reflected in the accounts..here 800crs outlay is kept on hold which leads to overstating assets(either intentional or unintentional)..so suppose sales be 1000cr and expenses be 1000cr out which current years' 200cr(above).. then profit will be 800cr... but when we look at cash out lay its -1000..... so when we compare +200 and -1000 where only 200 is reflected in the form of net income and 1000crs is ignored.we can easily come into conclusion that a company showing net income can go bankrupt