Net income vs cash flow statement

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Operating Cash Flow: Better Than Net Income?

The technical side of the investment banking interview is often comprised of valuation questions , capital markets questions, and accounting questions. When it comes to accounting, a favorite interview topic is the relationship between cash flows and net income. It is almost inevitable that a candidate will encounter questions like these answers at end of article:. The supply of cash Avon has available for such purposes as paying dividends, buying back stock and reducing debt has fallen short of its reported earnings for most of a decade.

Temporary differences between cash flows and accounting based profit net income are normal.

Difference Between Cash Flow and Net Income | Difference Between

For example, if Avon invoices customers, you would expect revenues to be greater than actual cash flows collected in certain periods. The problem emerges when the difference is persistent over time. There are many possible explanations for persistent divergences, most of which are not very good. A more sinister explanation is blatant earnings manipulation.

Since free cash flow and net income tend to balance out over the long run, persistent gaps between them can be a harbinger of asset write-downs or drop-offs in profit. For students trying to break into investment banking, equity research, private equity, or asset management, ultimately the key to navigating through these types of questions is deeply understanding the relationship between the cash flow statement and the income statement.

Net income is high but cash flows are low. Read full article here. As a company enters financial distress, it will hoard cash, not paying vendors, and collecting aggressively from suppliers.

Difference Between Cash Flow and Net Income | Difference Between

In the meantime, it will reduce capital investments, and not pay creditors. Depending on the agreement, cash flows from the airliners may come in after the company begins massive capital investments to service the contracts.

This would show a poor negative cash flow position, despite an income statement that captures those expected revenues. Wall Street Prep was established by investment bankers to enhance the competitive profile of students who seek a career in the financial services industry.

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Investment Banking Accounting Questions Lesson: It is almost inevitable that a candidate will encounter questions like these answers at end of article: Written by The Wall Street Prep Team support wallstreetprep. Click here to cancel reply. X The Wall Street Prep Quicklesson Series 7 Free Financial Modeling Lessons Get instant access to video lessons taught by experienced investment bankers.

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