Question

Can a company report negative net cash flows from operating activities for the year on the statement of cash flows but still have positive net income on the income statement? Explain

Answer 1

Yes,  A company may report negative net cash flows from operating activities for the year on the statement of cash flows but still have positive net income on the income statement.

A company can have a positive net income but a negative cash flow for the same year if it uses the accrual method of accounting to record revenues and expenses. Under the accrual system of accounting, net income can be increased by non-cash revenues that don't affect cash flow, whereas cash flow can be decreased by actual cash payouts that may not be considered expense deductions for net income. As a result, while sufficient non-cash revenue may help achieve a positive net income, enough non-expense cash payouts can lead to negative cash flow, all else being equal.

Net Income

Net Income is an accounting profit that is not measured by cash receipts and cash payouts. Companies may make credit sales and receive no cash payments from customers at the time, but still record revenues in computing net income. Meanwhile, companies record no cash inflows from the sales. Assuming that a company paid cash for expenses and had no other cash inflows for the year, given that revenues exceeded expenses, the company would have a positive net income, but a negative cash flow for the year.

Asset Increase

Cash flow for the same year can be further reduced by other cash payouts that are not counted as expenses incurred and thus don't lower net income.Cash paid to increase certain operating assets for the year, such as inventory purchase, is a form of cash outflow that, if large enough, could reduce total cash flow to be negative. Companies may also prepay certain expenses for the future that are recorded as incurred expenses only over time. As a result, while the entire prepayments are deducted for cash flow, only a portion of it, as incurred expense for the year, is subtracted for net income.

Liability Decrease

Companies also make cash payments to reduce operation- related liabilities, namely various payables. Payables are the results of accrued expenses from earlier periods that have not been paid in cash. At the time of expense incurrence, net income was reduced, while cash flow was not affected. However, in the year of paying off an outstanding payable, the cash payouts have no impact on net income, but will reduce cash flow for the year. If large amounts of payables are all due in the same year, their total cash payouts could cause cash flow to be negative.

To conclude, in the case of net income, it doesn't matter whether the transactions are in cash or not. Net income and revenues are reported on the income statement which they are earned whereas cash flow statement only deal with cash and cash equivalents.