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Cash Flow from Operating Activities vs Net Income [Video]

Cash Flow from Operating Activities vs Net Income

0:00 So what’s the difference between net income and cash flow from operating activities?
Net income is a company’s profit according to the accrual basis of accounting. Cash flow from operating activities (aka operating cash flow) is a company’s profit after removing the effects of accrual accounting.

Thus, you could view:
• Net income as accrual-basis profit
• Operating cash flow as cash-basis profit

0:23 But what does “accrual-basis profit” even mean? It means that net income increases when revenues are earned and decreases when expenses are incurred, not necessarily when cash changes hands. In other words, cash coming in or out has no effect on net income.

To find the cash generated by the company’s operations, you don’t go to the income statement. You go to the statement of cash flows.

There are 3 sections in the statement of cash flows (operating, investing, financing) but the information you want is in the top section: operating activities.

1:10 Now the operating activities section will be presented in one of two ways:
• If the company uses the direct method, it will show cash collected from customers and then subtract cash payments to suppliers, to employees, and for interest and taxes.
• Now if the company uses the indirect method, the operating section will instead start with net income and show various adjustments to undo the effects of accrual accounting

1:53 So how are net income and operating cash flow related?
net income = revenue recognized – expenses incurred
net income + / – adjustments = operating cash flow

2:10 How is operating cash flow derived from net income?

3:13 Can a company have net income and negative cash flows?

5:15 So which is better: net income or operating cash flow?
• You’ll hear more about net income in the financial news because it’s the basis for calculating earnings per share
• And analysts pay a lot of attention to earnings
• So it’s tempting to overlook operating cash flow
But remember that net income, and thus earnings per share, is the result of accruals. And accruals are affected by managers’ judgement, estimates, and in some cases manipulation.

Thus, it’s best to evaluate a company’s net income and its operating cash flow, and to make sure you understand any discrepancies between the two


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Resources for Accountants

Consideration of Illegal Acts [Video]

Have you ever considered the number of rules and regulations a company must adhere to as part of its business operations? Well, it’s a lot, which is why companies have legal counsel! But if you are an auditor, are you responsible for knowing the ins and outs of these various rules and regulations? Are you, as an auditor, required to perform procedures around these rules and regulations? What if somebody at your client purposely violates these rules and regulations – what do you do then? These are all great questions and are all covered in this CPE-eligible (0.5 CPE) eLearning course about the responsibilities of an auditor relating to laws and regulations in a financial statement audit, including what to do when noncompliance (i.e., an illegal act) is discovered. Check it out here: Coming Soon! Learn more about GAAP Dynamics: https://www.gaapdynamics.com/ Check out our other online courses on the GAAP Dynamics Learning Library: https://www.gaapdynamics.com/individu... Subscribe to GAAP Dynamics to see more videos like these!

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How to Successfully Start a Business from Scratch [Video]

Starting a business from scratch is a profound journey, one filled with excitement, challenges, and the promise of realizing your entrepreneurial dreams. It's an endeavor that demands a blend of creativity, resilience, and strategic thinking. While the path to success may not always be straightforward, there are essential steps and principles that can guide you through the process and increase your chances of building a thriving enterprise.

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Finance for Non-Finance Master Business Finance Without Prior Knowledge! [Video]

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Build Expert-Level Models with WallStreetMojo's Course! [Video]

🚀 Looking to master financial modeling and elevate your finance career? Whether you're an aspiring analyst, finance student, or professional aiming to sharpen your modeling abilities, this course is your gateway to building expert-level financial models!​ 🎓 Introducing WallStreetMojo’s Financial Modeling Course – Your comprehensive guide to constructing dynamic financial models, forecasting, and valuation techniques used by top investment banks and corporations.​ ✅ 13+ hours of self-paced, expert-led video tutorials ✅ One-year unlimited access – Learn at your convenience! ✅ Hands-on Excel-based learning with real-world case studies ✅ Master 3-statement modeling, revenue forecasting, and scenario analysis ✅ Exclusive McDonald's case study for practical application ✅ Earn a globally recognized certification upon course completion ✅ Rated 4.8⭐ by thousands of satisfied learners!​ 🔹 What You'll Learn: 📌 Build comprehensive financial models from scratch 📌 Understand financial statements and accounting principles 📌 Gain proficiency in Excel for finance and modeling 📌 Apply real-world scenarios to reinforce learning​ 📜 Upon completion, you'll receive a professional certificate to enhance your resume and open doors to opportunities in investment banking, equity research, corporate finance, and more.​ 💡 Join over 100,000 learners who have transformed their careers with WallStreetMojo. It's your turn to gain a competitive edge in the finance industry!​ 🎯 Start your journey to mastering financial modeling today – Click below to enroll now! 👇​ 🔗 https://www.wallstreetmojo.com/financial-modeling/financial-modeling-course/ 📢 Subscribe for more practical finance training and career tips! 🔔 Turn on notifications to stay updated on the latest in finance education!