Question

Which of the following statements is false about cash flows? Net cash flows represent cash inflows minus cash outflows. They are based on when they occur, not when they accrue. Net cash flows equal net income. None of these are false.

Answer 1

Answer:

Cash flow refers to the net amount of cash inflow being received or out from the entity. If an entity is able to generate positive cash flow it results in increase in wealth for their investor & also maximizes the free cash flow in the long term. Positive cash flow helps an entity to operate it's operating efficiently.

Net cash flow represents the cash inflow minus cash outflow, the positive cash flow helps an entity to operate its functions efficiently & also able to avoid the short term liquidity crunch for future while negative cash inflow is unfavorable for any entity & affects the operation & profitability of an entity.

Cash flow is based on a receipt basis & not on an accrual basis for example if an incurred any liability which has required to be paid in next year it should be excluded while determining the net cash flow.

Net cash flow is not equal to net income as net income included the transaction on accrual basis such as commission receivable, expenses payable, etc. were included in determining the net income, however while determining the cash flow on transaction which results in cash inflow or outflow should be considered.

Accordingly, Option (C) i.e. "Net cash flows equal net income" is the correct answer.