Question

Accounting net income is based on accruals which

a. Includes timing of cash flows

b. Ignores timing of cash flows

c. Measures only cash inflows

d. Measures only cash outflows   

Select one:

a. Measures only cash outflows

b. Measures only cash inflows

c. Includes timing of cash flows

d. Ignores timing of cash flows

Answer 1

Accounting net income is based on accurals which

d)Ignores the timings of cash flows because .

b)If cash flows are scheduled to be received in the future from a company's investment, such as an investment in a building or piece of equipment, time value of money is used to calculate the present value the value now of those cash flows.

c)Accruals are revenues earned or expenses incurred which impact a company's net income on the income statement, although cash related to the transaction has not yet changed hands. Accruals also affect the balance sheet, as they involve non-cash assets and liabilities

d)As per basic assumptions of accounting it is not neccessary to include cash which will be derived from the future

e)Net income is commonly used as a measure of company performance. However, it can yield misleading results under the following circumstances:

Cash flows (a better indicator of company health) may differ significantly from net profit, due to the inclusion of noncash revenues and expenses in the compilation of the net profit figure.

Net income derived under the cash basis of accounting can vary substantially from net income derived under the accrual basis of accounting, since the first method is based on cash transactions, and the latter method records transactions irrespective of changes in cash flows.

f)therefore igonre timing of cash flow is the best option we can choose