Question

Knowledge Check 01 net cash activities are net income in the income statement equal to greater than less than

Answer 1

Ans ) The net cash flow from operating activities are usually not the same as the net income reported in the income statement.

Net Income: A net income is the difference between incomes and relates expenses of the business including all accrual expenses.

Cash flow from operating activities: It is the difference between company’s cash flow and cash outflow of company’s main business activities.

Cash flow from operating activities=Net Income +Non cash expenses +Changes in working capital

Non cash expense=Depreciation and amortization.

So net income is the starting point of calculating cash flow from operating activities.

Example (1)

Cash Flows from Operating Activities
Net Income			$                    20.00
Depreciation Expense		$              8.00
Bad debt Expense		$              1.00
Loss on sale of building		$              3.00
Decrease in Discount on Bonds Payable		$              1.00
Decrease in Accounts Receivable		$            18.00
Increase in Inventory		$            (5.00)
Increase in Dividend receivable		$            (1.00)
Decrease in Accounts Payable		$          (32.00)
Decrease in Salary Payable		$            (2.00)
Increase in Interest Payable		$              4.00
Decrease in Income Tax Payable		$            (1.00)	$                    (6.00)
Net Cash provided by operating activities(A)			$                    14.00

Example (2)

Net Income			$                                    845.00
Depreciation Expense		$                                                        180.00
Patent Amortization Expense		$                                                        150.00
Loss on sale of equipment		$                                                          10.00
Increase in Accounts Receivable($350-$190)		$                                                      (160.00)
Increase in Inventory($500-$275)		$                                                      (225.00)
Increase in Accounts Payable($600-$400)		$                                                        200.00
Increase in Accrued Expenses Payable($150-$130)		$                                                          20.00
Gain on Sale of Land		$                                                        (30.00)
			$                                    145.00
Net Cash provided by operating activities(A)=($845+$145)		$990	$                                    990.00

In example (1): Net Income > Cash flow from operating activities

In example (2): Net Income< Cash flow from operating activities