Question

Are th? significant discrepancy between Net Income and CFO? Does this gap change over time

Answer 1

YES, IT IS POSSIBLE THAT SIGNIFICANT DISCREPANCY MAY EXIST BETWEEN NET INCOME AND CFO.

THERE ARE SEVERAL REASONS FOR THE DISCREPANCY BETWEEN THE NET INCOME AND CFO.

SOME OF THEM ARE LISTED BELOW

- NET INCOME IS CALCULATED BASED ON ACCRUAL PRINCIPLES. WHILE CFO IS ONLY RELATED WITH CASH ITEMS.

- WHILE CALCULATING THE NET INCOME, WE CONSIDER THE REVENUE WHICH ARE NOT YET RECEIVED IN CASH OR IN BANK BUT ARE RECEIVABLE.  

- WE ALSO CONSIDERS THE EXPENSES WHICH ARE NOT PAID IN CASH BUT HAVE A STATUS OF PAYABLE.

THESE ARE NON CASH AND THEREFORE THE EFFECT OF THEM GETS ELIMINATED WHILE COMPUTING THE CFO.

- SOME EXPENSES WHICH ARE NOT THE NATURE OF OUT OF POCKET EXPENSE WHICH WILL NEVER BE PAID IN CASH ALSO CONSIDERD WHILE CALCULATING THE NET INCOME. FOR EXAMPLE AMORTISATION OR DEPRECIATION OR GAIN OR LOSS ON SALE OF ASSETS.

THESE ARE NON CASH ITEMS AND SHALL NOT BE CONSIDERED AS DISBURSEMENT FOR CFO CALCULATION.

- SOME INCOME OR EXPENSES OR DISTRIBUTIONS ARE DUE TO ACTIVITIES OF FINANCE OR INVESTMENTS ARE ALSO CONSIDERED IN NET INCOME CALCULATION. FOR EXAMPLE, INTEREST PAID TO DEBENTURE HOLDERS. DIVIDEND OR INTEREST RECEIVED ON INVESTMENT.

CFO ARE RELATED TO OPERATING ACTIVITY AND HENCE, ITEMS RELATED WITH OTHER ACTIVITY SHALL BE REVERSED.

SOME OF THE REASONS ARE HAVING THE PERMANANT IMPACT LIKE THEY WILL NEVER GET REVERSED OVER A PERIOD OF TIME. FOR EXAMPLE DEPRECIAITON. IT WILL NEVER BE PAID IN CASH NOT IN CURRENT YEAR OR NOT IN ANY SUBSEQUENT YEARS.

WHILE SOME REASONS MAY HAVE REVERSAL IMPACT IN SUBSEQUENT YEARS.