How to Increase Net Income and Cash Flow in Your Business
What are the factors that could explain why a company's net income increased sharply while its net cash provided from operations declined?
Which of the following factors could explain why a company's net income increased sharply from the previous year, yet its net cash provided from operations declined?
A) The company's cost of goods sold increased.
B) The company's depreciation expense declined.
C) The company's dividend payment to common stockholders declined.
D) The company's interest expense increased.
E) The company's expenditures on fixed assets declined.
Explanation:
The fact that a company's depreciation expenditure decreased may help to explain why, despite a significant increase in net income from the previous year, net cash supplied by operations decreased. Option B is Correct.
Net income is an important metric that reflects the profitability of a business. It is calculated by subtracting the total expenses from the total revenue. However, net income doesn't always directly translate to cash flow. This is where understanding the factors that can impact both net income and cash flow is crucial for business success.
One factor that can affect net income and cash flow is the company's depreciation expense. When the depreciation expense declines, it can lead to an increase in net income as the company's reported profits rise. However, since depreciation is a non-cash expense, it doesn't impact the company's cash flow in the same way. This discrepancy can explain why net income may increase while cash flow from operations declines.
It's important for businesses to analyze both their net income and cash flow to get a comprehensive view of their financial performance. By understanding the nuances of these metrics and the factors that can influence them, companies can make informed decisions to improve their overall financial health.