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# Accounting Income Versus Cash Flows

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"Over sufficiently long time periods, net income equals cash inflows minus cash outflows, other than cash flows with owners."

Demonstrate the accuracy of this statement in this scenario:

Two friends contribute \$50,000 each to form a new business. The owners used the amounts contributed to purchase a machine for \$100,000 cash. They estimated that the useful life of the machine was five years and the salvage value was \$20,000. They rented out the machines to a customer for an annual rental of \$25,000 a year for five years. Annual cash operating costs for insurance, taxes and other items totaled \$6,000 annually. At the end of the fifth year, the owners sold the equipment for \$22,000, instead of the \$20,000 salvage value initially estimated.

Compute the total net income and the total cash flows other than cash flows with owners for the five-year period as a whole.