Question

Which one of the following affects net income but not the operating cash flow?

1)    taxes 2)    interest expense 3)    dividends 4)    cost of goods sold

Answer 1

1. Taxes

Taxes are deducted from pre-tax income to compute net income. Tax expenses are used to compute operating cash flow.

2. Interest Expense

Interest expenses are deducted under the category, “non-operating” to arrive upon the net income. Since Net income already includes the interest expense incurred for the firm during the period, interest expense will not be reflected in the cash flow statement.

3. Dividends

Dividends do not effect the income statement, as they are not an expense. It is reported as a cash outflow in the cash flow from financing activities section.

4. Cost of Goods Sold

Cost of goods sold expense is deducted to compute net income in the income statement. The change in inventory is entered as cost of goods sold under operating cash flow.

Therefore, among the above items, interest expense effects the income statement but not the cash flow statement.