Net Income vs. Cash Flow

Cash flow

the total amount of money being transferred into and out of a business, especially as affecting liquidity. cash received from customers and cash paid out to various stakeholders of the firm .. employees, suppliers, creditors..etc. You pay people with cash, you don't pay them with profit.

Net income

the total earnings of a business including both operating and non-operating income. Looks at revenues(earnings of assets) and expenses(costs of generating revenues) = profit...not necessarily just cash. reports total profitability. You pay people with cash, you don't pay them with profit. (This is where cash flow comes into play)

A business can go bankrupt even though its net income has been historically positive.

true

A business can survive with little or no financial damage and report a negative net income

true

Not-for-profit businesses must still make a profit to produce funds needed for new assets.

true

Is cash flow a better representation of an organization's financial position (at least in the short run)

yes

What can investor owned businesses do with net income?

-May pay dividends first. -This means that the amount of profits reinvested in an investor-owned business is net income minus the amount paid out as dividends. -Business can also distribute profits to owners in the form of bonuses. When this is done, distribution becomes an expense item that reduces net income rather than a distribution of net income. The end result is the same - monies are distributed to owners - but the reporting mechanism is much different.

Why is net income called the "bottom line"?

Because of it's location on the income statement and its importance

Cash flow = NI + non cash expenses

Cash flow = NI + non cash expenses

What happens to net income?

For the most part, it gets reinvested in the business

What is the difference between net income and operating income?

Operating income is the earnings of a business directly related to core activities; patient services. Net income is the total earnings of a business, including both operating and non operating income.

The statement of cash flows sections

Operations - the business that we're in, adjusting from accrual to cash basis. Assets, flip the sign. Liabilities, keep the sign. Investment - building, equipment, or buying other companies stock. Financing - the borrowing/repayment of loans OR selling stock. So, financing can come from equity and debt.

What is depreciation cash flow, and what is its expected use?

The amount deducted from revenue but not actually paid out in cash. Eventually, businesses use the accumulated total of depreciation cash flow to replace its fixed assets as they wear out or become obsolete.

Depreciation is a non cash expense because

it initially is subtracted from revenues to obtain NI, even though there is no associated cash outlay

Net income can also be defined as, "the excess of revenues over expenses" for

not-for-profit businesses.

One can check the statement of cash flows balances by

operations + investment + financing = change in cash balance

In accrual accounting

reported revenue does not equal cash revenue (some) expenses do not equal actual cash outflows and the depreciation expense is NEVER paid

Both operating income and net income measure profitability as defined by GAAP.

True

Non-profits MUST reinvest net income in the business

True. This reinvestment increases equity.