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In: Accounting

An organization's cash flow will always be equivalent to its operating income​

An organization's cash flow will always be equivalent to its operating income​

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Expert Solution

False

An organizations cash flow is not the same as its operating income. Operating income records transactions of non cash nature too such as depreciation cost, amortization cost. Whereas cash flow of a company deals only with cash transactions.

A statement of cash flow generated by indirect method shows a reconciliation of cash from operation with the Operating income.

Moreover cash flow changes due to financing and investing activities. Financing activities include proceeds from loan, shares issue, payments of dividends, payments or retirements of debts etc. Investing activities include Purchase and sale of fixed assets or Investments.

Financing and investing activities affect cash balance but not operating profit.

A company may having huge profits may still have cash deficits that is why it is said that an organization's cash flow may not be equivalent to its operating income​. The difference between operating cash flow and operating income is due to accrual system of accounting. Practically speaking if a company follows cash accounting then cash from operation would be same as operating income.

ekkarill92 answered 1 year ago
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