Is it possible to have a positive net income and negative cash flow from operations? Ifyour answer is no, explain fully. If your answer is yes, provide two examples when one mightfind this. (4 marks)
Question
Is it possible to have a positive net income and negative cash flow from operations? Ifyour answer is no, explain fully. If your answer is yes, provide two examples when one mightfind this. (4 marks)
Solution
Yes, it is possible for a company to have a positive net income and a negative cash flow from operations. This situation can occur due to the differences between how net income and cash flow are calculated.
Net income is calculated based on accrual accounting principles, which recognize revenue when it is earned and expenses when they are incurred, regardless of when the cash is actually received or paid. On the other hand, cash flow from operations is based on the actual inflow and outflow of cash during a specific period.
Here are two examples when a company might have a positive net income and negative cash flow from operations:
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High Accounts Receivable: If a company makes a lot of sales on credit, it will recognize the revenue immediately, which increases net income. However, if the customers do not pay their bills on time, the company will not have the cash inflow from these sales, leading to a negative cash flow from operations.
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High Inventory Purchases: If a company purchases a large amount of inventory, it will pay cash for the inventory, leading to a negative cash flow from operations. However, the expense of the inventory is not recognized until the inventory is sold, so the net income will not decrease at the time of purchase.
In both these situations, the company's financial statements would show a positive net income but a negative cash flow from operations.
Similar Questions
Which of the following statements is true?For an entity to survive, the net cash flow from operating activities should be positive.For an entity to survive, the net cash flow from investing activities should be positive.For an entity to survive, the net cash flow from financing activities should be positive.For an entity to survive, the net cash flow from operating activities should be negative.
Which of the following could cause accrual-based profits to be higher than net cash flows from operating activities?Group of answer choicesNone of the options is true.Some expenses for the period have not been paid.Not all of the cash has been received for sales made in the accounting period.Depreciation expense has been included in the accrual-based profit.
In the statement of cash flows, net cash flows from operating activities plus net cash flows from investing activities plus net cash flows from financing activities for the period equal:Group of answer choicesthe cash balance at the beginning of the period.total net increase or decrease in cash held for the period.the cash balance at the end of the period.operating profit.
Using the information below, calculate net cash flows from operating activities: Net income $120,000Receive cash from issuing stock 80,000Pay cash for equipment 90,000Increase in accounts receivable 10,000Depreciation expense 30,000Increase in accounts payable 5,000Receive cash from sale of land 75,000Pay cash dividends 20,000Multiple Choice$155,000.$190,000.$145,000.$115,000.
Which of the following is NOT a situation when it would be important to analyze cash flow information because net income is NOT giving an accurate portrayal of the economic performance of the company?When a company is growing rapidlyWhen a company has several large non-cash expensesWhen a company has a negative operating cash flowWhen a company is striving to present a stellar financial record
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