Question

If a company reports positive net income for the year, is it possible for that company to show a net cash "outflow" from operating activities? Explain your answer. Consider the difference between the income statement and the cash flow statement.

Answer 1

Meaning:

"Net Income" is a profit of a Company earned or the income that’s ermaining after all the Expeses have been occurred for the Period.

"Cash Flow" is the net Amount of Cash or Cash Equivalents being transacted in and out of a Company in a given Period.

Cash Flow and Net Income different in cases because there is a gap between Documented Sales and Actual Sales.

In other words, Profit and Cash Flow are related Financial measurements in Accounting but they are not directly linked. The below small situation can expain better the above reasons.

For Example:

A Company may make Sales of $100 for the Fiscal Year but if the 30% of those sales were made to customers who uses there company credits, the company would only receive the 70% of the revenue in cash. The 30% of the Revenue would be owed to the Company by Customers who will pay the amount in a future reporting Period.

The Difference of repoorting can be shown below.

Profit for the Period:

= Revenue $100 less Expenses $80

= Profit of $ 20

Cash flow for the Period:

= Cash sales $ 70 Less Expenses $80

= Negetive $ 10

Where in above example we can see the Profit as per the Income Statement though the amount in negetive as per the Cash Flow Statement.

Conclusion : Yes, If a company reports positive net income for the year, it is possible for that company to show a net cash "outflow" from operating activities