In comparing accounting net income and operating cash flowname two items you typically find in net income that are not found in operating cash flow.  Explain what each is and why it is excluded in...

In comparing accounting net income and operating cash flow

name two items you typically find in net income that are not found in operating cash flow.  Explain what each is and why it is excluded in operating cash flow.

Asked on by dioson

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marbar57's profile pic

marbar57 | Elementary School Teacher | (Level 3) Associate Educator

Posted on

The two missing elements are interest and taxes!  Listen to this:

Since it adjusts for liabilities, receivables, and depreciation, operating cash flow is a more accurate measure of how much cash a company has generated (or used) than traditional measures of profitability such as net income or EBIT.  Earnings before interest, taxes, depreciation and amortization (EBITDA) is the best gauge to evaluatiing a company's profitability based on net working capital.

 If you want a few more definitions, here they are:

Interest:   a fee paid on borrowed assets.  It is the price paid for the use of borrowed money, or, money earned by deposited funds.

Tax:  a pecuniary burden laid upon individuals or property owners to support the government, or, a payment exacted by legislative authority.

Depreciation:  a decline in the value of assets, and allocation of the cost of assets to the periods in which they are used.

Amortization:  the process of decreasing, or accounting for, an amount over a period of time.

An additional link is http://en.wikipedia.org/wiki/Amortization.

I hope this information is helpful!

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