Cash flow differs from earnings because
A) cash flow includes depreciation expense
B) earnings can be negative
C) taxes only affect earnings
D) interest expense only affects cash flow

Question

Quizplus · Accepted Answer

Cash flow includes depreciation expense, which is a non-cash expense. Earnings, on the other hand, do not include non-cash expenses like depreciation. This makes cash flow a more accurate measure of a company's ability to generate cash.

Answer: B
 Earnings can be negative, which means that a company's expenses exceeded its revenues. Cash flow, however, can still be positive even if a company's earnings are negative, as cash flow takes into account non-cash expenses like depreciation.

Answer: C
 Taxes affect both earnings and cash flow, as taxes are a cash expense.

Answer: D
 Interest expense affects both earnings and cash flow, as interest is a cash expense.

Cash Flow Differs from Earnings Because