Taxes, payment patterns, and reporting considerations, as well as credit sales and non-cash costs, are reasons...

Taxes, payment patterns, and reporting considerations, as well as credit sales and non-cash costs, are reasons why operating cash flows can differ from accounting profits.

True or False?

Expert Solution

The above statment is True. Yes Operating cash flows and accounting profits can differ from each other.

Explanation: Operating cash flows are used to measure project proposal and the outcome of those projects may differ maybe based on economic, political, firms internal factors etc. Whereas accounting profits are the measure of company's historical performance which based on reporting standards which mostly follows accrual system of accounting. It maybe so but operating cash flows can be derived from historical data and accountng profits can be derived for future projects. Operating cash flows and accounting profits differ from each other on various basis that is as mentioned above in the statment taxes, payment patterns as explanied futher below:-

a.) Taxes: Operating cash flows records taxes based on current taxes but accounting profits has to account for both current taxes and deferred taxes.

b.) Payment patterns: Operating cash flows and accounting profits may differ from each other based on what was forcasted to be manner of payment and what will be in real circumstances

c.) Reporting Consideration. As mentioned earlier accounting profits are derived after following reporting standards which themselves vary on basis of countries like US GAAP for USA or IFRS for other countries.

d.) Credit sales: Operating cash flows are based on cash inflows and outflows and accounting follows accrual system of aacounting where transactions are reacorded as they are sold.

e.) Non-cash costs. Non cash costs like depreciation and amortisation are reduced from earnings for tax purposes for operating cash flows and added back while calculating cash flows because these are not cash outflows while they are are reduced from earnings for better presentaion of financial statements and not added back while deriving accounting profits.

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