Discuss how operating cash flow could exceed operating income.

Expert Solution

Cash flow from operations is always greater than net profit simply because there is a timing delay between an expense being incurred and an expense actually being paid from the bank account. This delay causes the cash at bank to always be much higher than the actual profit earned.

Also, not all expenses that reduce profit, impact on cash. i.e. depreciation on equipment and amortization on intellectual property rights. While these expenses reduce profit they don't impact in any way on the cash flow causing the cash flow to be greater than the net profit.

There are several reasons why this could be:

non cash items included in net income, such as depreciation/amortization and stock-based compensation
decreases in current assets
increases in current liabilities
There will be a opening balance of cash.
Profit is arrived after considering depreciation, expenses payable etc. which reduces the profit and makes no effect to cash balance
Capital increase made though cash

ekkarill92 answered 2 years ago

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