A firm may have a significant amount of net income, as computed under the accrual basis of accounting, yet have an insignificant net inflow of cash.

Question

Quizplus · Accepted Answer

Net income is calculated using the accrual basis of accounting which takes into account revenues earned and expenses incurred whether they have been received or paid for. However, cash flow is calculated using the cash basis of accounting which only takes into account actual inflows and outflows of cash. Therefore, a firm may have a significant amount of net income but have an insignificant net inflow of cash.

A Firm May Have a Significant Amount of Net Income