Corporate profit, loss and cash flow
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Corporate profit, loss and cash flow
As a result of this way of computing the costs of the corporation (which is very close to the way the real world works), corporations show a stable financial process. Their income and cost may vary from month to month but the cost depends on the level of production and is independent of the purchase of raw materials. The profit and loss of the corporation is realistic and with it the stock value and market value of the corporation.
The cash flow in a corporation is more erratic. There are many months with income from product sale and no cost for materials, which causes the cash to go up fast. There are also several months when the corporation makes large purchases of materials and its cash sinks very fast and may end up deep in the red. In general, the total of cash plus the value of materials in stock plus the total debt of the corporation is stable and will go up if the corporation makes a profit and down is it loses money.
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