Discuss the major differences between the net income and the cash provided or used by operating...

Discuss the major differences between the net income and the cash provided or used by operating activities, and explain the cause of the major difference between the two values.

Expert Solution

Net Income is the profit a company has earned during the period. Cash flow from operating activities relates to cash going in and cash going out during a company's day to day operations.

Net income is calculated by using accrual basis of accounting under which expenses are recognized at the same time as revenues to which they relate. Net cash flow is determined by changes in the working capital added back to net income on cash basis of accounting

Net income is earned revenues minus the incurred expenses, including taxes and COGS. Cash flow from operating activities is the cash from revenues , excluding non operating sources (eg investments and interests).

For calculating cash flow from operating activities, net income is the starting point which is then adjusted after adding back non cash items and changes in working capital to arrive at cash flow.

Cash flow and net income statements are different because there is time gap between documented sales and actual payments.

ekkarill92 answered 2 years ago

Net cash provided by Operating activities

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