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Consider these two scenarios and provide your answer to both scenarios in your response:
- Is it possible to have a positive net income and negative cash flow from operations? If your answer is no, explain fully. If your answer is yes, provide two examples when one might find this.
- Is it possible to have a negative net income and positive cash flow from operations? If your answer is no, explain fully. If your answer is yes, provide two examples when one might find this.
Just do response each posted # 1to 3 down below only.
Yes, it is possible to have a negative net income and a positive cash
flow from operations. Two examples are as follows: a company can
purchase an asset but does not have to pay for it until the next period
due to accrual accounting (Murphy, 2018). For instance, a company makes a
purchase in Q1 but does not for it until the next quarter. From this, a
net loss may occur while there is a positive cash flow. Another example
is depreciation. “Net income is calculated by deducting a company’s
expenses, and depreciation is one of those expenses” (Murphy, 2018). In
other words, if a company has a net loss for the period along with a
significant depreciation expense, a positive cash flow may result while a
net loss is recorded.
It is also possibe to have a positive income and a negative cash
flow. The two reasons are as follows: a company can increase net income
by an increase in receivables (assets). With accrual accounting,
revenues are recognized when earned. Cash does not have to be paid for a
transaction to take place. Therefore, this can increase net income
while decreasing cash flow. The other example is a liability decrease.
The payment of an outstanding liability during a year will not have an
effect on net income but will reduce cash because of the cash payment.
If a significant amount of liabilities are due in the same year, this
could drain cash flow while having no effect on net income; this mainly
stems from accruing expenses and the method of accrual accounting.
Yes it is possible to have a positive net income and a negative cash
flow one example of this would be if you purchased supplies last year
and made the payment in this current year. Another example of this would
be if you were to sell a product on account. This would increase your
net income but would not increase cash flow until the payment for the
receivable is completed threw the customer. Yes it is also possible to
have a negative net income with a positive cash flow an example would be
collected sales on account from the previous year. Collecting the debt
owed to you would not increase the net income but would increase cash
flow due to the net income being recorded at the time of the purchase.
Another example of the this would be depreciation but gained business
loan as you gained the money from the loan but lost on the depreciation.
Yes, it is possible to have a positive net income and negative cash flow from operations. One example for why this scenario may occur is receivables. With the accrual method, revenue is recorded when it is earned; therefore, sales entered as a receivable without a cash payment being received would increase net income but would not increase cash flow. Another example for why this scenario may occur is a significant increase in inventory. Cash has been paid for the purchases, but the inventory has not yet been converted to a sale. As a result, inventory as an asset on the balance sheet is not impacting net income, and cash flow has decreased since the inventory has already been purchased.
Yes, it is possible to have a negative net income and positive cash flow from operations. One example for why this scenario may occur is depreciation expense. Depreciation is a noncash expense and is added back to net income in the cash flow statement. The expense, however, is deducted from net income. Therefore, a large depreciation expense could result in negative net income and, after being added back into the cash flow statement, positive cash flow. Another example for why this scenario may occur is payables or accrued expenses. With the accrual method, expenses are recorded when they are incurred. A substantial expense may be recorded in one period but not paid until a future period. As a result, the expense may cause a decrease in net income without a decrease in cash flow until the payment occurs.