The quarterly cash flows from operations for two technology companies are as follows:
$$\begin{array}{cccccc}& 2013& & & & 2014\\ & \mathrm{Q}1& \mathrm{Q}2& \mathrm{Q}3& \mathrm{Q}4& \mathrm{Q}1\\ \text{ Firm 1 }& \$451.2& \$220.8& \$703.5& \$475.5& \$601.2\\ \text{ Firm 2 }& \$165.9& \$240.7& \$698.8& (\$91.8)& (\$173.3)\end{array}$$
Required:
Explain why Firm 2 has more credit risk than Firm 1.

The quarterly operating cash flows of both firms fluctuate seasonally,i.e.,operating cash flow levels change from quarter to quarter and the changes are not all positive.Seasonal patterns in sales and operating cash flow are common in many industries,and the cash flow volatility produced by seasonal sales is itself a contributor to increased credit risk.In addition,Firm 2's operating cash flows are lower than those of Firm 1 and are negative in the two most recent quarters.These two features of Firm 2's operating cash flow make it a greater credit risk than Firm 1.