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...
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.
First, it's important to understand how net income and operating cash flows are defined. Net Income is analogous to profit and is calculated by taking total sales and subtracting the cost of goods sold (COGS), selling and general administrative expenses (SG&A), operating expenses, depreciation, taxes, and other expenses. Net income is found on a firm's income statement (see example below).
Operating Cash Flow is equal to net income plus non-cash expenses minus any increases in net working capital. Operating cash flows are concerned primarily with cash inflows and outflows related to a firm's...
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Depreciation and credit sales are two items you find included in net income, but not in operating cash flow. This is because net income includes non-cash items, while operating cash flow does not. This is also how it's possible for a firm to have positive net income and negative cash flow.
At a high level, you can think of net income as a broad overview of all sales and expenses over a given period of time. Likewise, you can think of operating cash flow as a narrow overview of sales and expenses. Net income includes credit sales and non-cash items like depreciation.
- What exactly is depreciation? Depreciation is a non-cash expense used to account for equipment usage over time.
- What are credit sales? Credit sales are when a customer purchases your product without paying cash. The net income statement counts the credit sale as a sale, but the cash flow statement does not. It is not included in operating cash flow because no cash has been received. When cash is received from the customer it is included in operating cash flow.
You can find a reconciliation between net income and cash flow from operations on the cash flow statement.