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The Income Statement and Statement of Cash Flows

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In an executive manager's meeting, a company's chief financial officer reported that the year-to-date net income on the company's income statement was $1.2 million. The chief financial officer then said, "Based on this figure, we finally have the funds we need to begin our much needed building expansion."

Why should you consider this argument with caution? Explain.

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Solution Summary

This solution discusses the differences between accrual-basis net income and cash flows.

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Companies prepare their financial statements, including their income statements, using the accrual method of accounting. Under this method, they recognize revenues when they earn them rather than when they collect the cash. ...

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