Discuss some factors or events that could lead to a positive net income but negative cash flow from operations.
Peer #1-Garth
Hello class,
Discuss some factors or events that could lead to a positive net income but negative cash flow from operations.
Some factors that could lead to a positive net income but show a negative cash flow could be land acquisition, an increase in accounts receivable, purchase of stocks, or having a surplus in inventory. Cash flow doesn’t make up an entire company’s asset portfolio. If a company buys land for cash, cash flow will decrease, however, they gain an asset in land purchase, and land generally increases in value. An increase in accounts receivable implies that cash hasn’t been paid for services. At the time of the report, a large sum of cash could be tied up in these accounts, and the company would simply be waiting for payment. Purchasing stocks or having a surplus in inventory takes cash to obtain, but there’s value in these assets. Our textbook says that “sales on account generate revenues that increase net income, but the company has not yet collected cash from those sales. Accrued expenses decrease net income, but the company has not paid cash if the expenses are accrued” (Miller-Nobles & Mattison, 2015).
Explain any concerns that you might have about a company that reports negative cash flows from operations for three consecutive years.
Three years of negative cash flow shows poor management of assets, possibly a large amount of account receivables, indicating a poor credit checking system, and overspending. Investors should take a look at cash flow statements as well as other financial statements to determine the cause of why there’s no increase in cash over the years.
Explain why depreciation expense, depletion expense, and amortization expense are added to net income in the operating activities section of the Statement of Cash Flows when using the indirect method.
These expenses are added to the net income section because they are operating activities. Depreciation deals with assets such as equipment, buildings, tools, etc., items needed for operating a business. Depletion deals with resources, and amortization with intangible assets. These expenses were assets at some point and cash was paid initially, but cash hasn’t been exchanged due to the depreciation, depletion, or amortization of the assets. Adding these expenses back to net income shows cash was not expended for these losses.
Recommend three ways that a company might improve their cash flows.
Collecting from accounts receivable could increase cash flow. Having a system in place to check customer credit to ensure payments are paid on time could reduce the number of accounts receivable, ensuring a steady cash flow. Companies can also sell their “account receivables to another business, often called a factor” (Miller-Nobles & Mattison, 2015). This will provide cash flow and reduce account receivables from their accounting forms. Lastly, selling assets would provide an influx of cash, however, may be better to hold on to these.
References:
Miller-Nobles/Mattison. Horngren’s accounting: The financial chapters (7th ed.). Pearson.
Peer #2-Jarel,
Discuss some factors or events that could lead to a positive net income but negative cash flow from operations.
A company could report positive net income along with negative cash flow if they have offered customers the opportunity to pay on credit. This would lead to revenue in accounts receivable that wouldn’t amount to increased cash flow. There isn’t any movement of cash immediately resulting in negative cash flow.
Explain any concerns that you might have about a company that reports negative cash flows from operations for three consecutive years.
Cash flow of operating activities reflects the cash inflows and outflows of day-to-day operations (Miller-Nobles & Mattison, n.d.). Negative cash flow for a short period may not be much cause for concern as it could simply mean that some accounts receivables have yet to be collected. If a business were to report three consecutive years of negative cash flow, it would highlight that the company may not have the adequate funding to operate much longer.
Explain why depreciation expense, depletion expense, and amortization expense are added to net income in the operating activities section of the Statement of Cash Flows when using the indirect method.
Non-cash expenses to net income to make the net income and net cash flow from operating activities equal. If not added to the statement of cash flow, non-cash expenses could result in discrepancies between net income and net cash flow in the indirect method.
Recommend three ways that a company might improve their cash flows.
One way to improve cash flow while still being able to offer the option for credit purchases to customers is by performing better credit checks (Moskowitz, 2022). This would ensure that only credit options are afforded by customers with consistent payment history. Companies could also offer discounts if customers pay accounts early. Companies could also offer discounts on cash payments that would result in more immediate cash flow.
Miller-Nobles, T & Mattison, B. (No Date). Horngren’s Accounting: The Financial Chapters (Seventh Edition). Pearson. 16.2: How Is the Statement of Cash Flows Prepared Using the Indirect Method? (pearson.com)
Moskowitz, D. (2022, September 10). 10 Ways to Improve Cash Flow. Investopedia. Cash Flow: 10 Ways to Improve It (investopedia.com)
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