A company’s cash balance does not agree with net income. Explain why this is true and...

A company’s cash balance does not agree with net income. Explain why this is true and provide an example/explanation of either a cash receipt or a cash payment that is not included in net income.

Expert Solution

An Income statement in a firm is prepared on accrual concept basis. Accrual basis is the fundamental concept for accounting. It means account for revenue and expenses as and when they are earned or incurred respectively. On the other hand, cash flow statement is prepared on cash basis that is as and when cash receipts and payments happen. Cash flow statement is a supplement to financial statement so that users can understand how cash movements are happening in a firm. A firm having high net income during the period can have low cash flows if its currents assets and liabilities are not well managed. So net income reported in income statement and cash balance reported in cash flow statement is never same due to different concept of accounting.

Examples:

· Prepaid expenses during the year involves cash outflows but is accounted in income statement on accrual basis.

· Cash proceeds received for sale of assets are accounted in Income statement for profit or loss on sale of assets and not for cash receipts of sale of assets.

ekkarill92 answered 2 years ago

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