REASON BEHIND THE DIFFERENCE BETWEEN NET INCOME AND CASH FROM OPERATING ACTIVITIES IN CASH FLOW STATEMENT


Reason behind the difference between net income and cash from operating activities

Cash flow statement is a part of a set of financial statement and prepared along with balance sheet and income statement to report the cash inflow and outflow within the organization in an accounting period. Cash flow is of vital importance to the health of a business. One saying is: “revenue is vanity, cash flow is sanity, but cash is king”. What this means is that whilst it may look better to have large inflows of revenue from sales, the most important focus for a business is cash flow.

Net income can be expressed in following equation.
Net income= Revenue – Expenditure
When there is high net income in given current year refers to high amount of profit of the organization.
On the other hand,
Cash flow from operating activities= Ending cash balance - Cash flow from investing  activities - Cash flow from financing activities
When there is the result of excess of operating cash inflow over operating cash outflows .
For e.g.

a)     Sales  >increase in sundry debtors
b)     Decrease in creditor> cost of goods sold
c)      Decrease in outstanding salaries > payment of tax

Net income and operating cash flow are of different things. Net income is calculated under accrual basis concept and following the revenue recognition, matching principle and accounting period concept of accounting. It includes cash /non cash revenue generated and cash/non cash expenditure incurred within an accounting period to determine the net income.
On the other hand cash flow statement is prepared under cash basis concept .It records only cash receipts and cash payment. This is the main causes of difference in net income and operating cash flow.






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