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Www.izmirekonomi.edu.tr L24: Net Income Versus Cash Flow ECON 320 Engineering Economics Mahmut Ali...
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Transcript of Www.izmirekonomi.edu.tr L24: Net Income Versus Cash Flow ECON 320 Engineering Economics Mahmut Ali...
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L24: Net Income Versus Cash Flow
ECON 320 Engineering EconomicsMahmut Ali GOKCEIndustrial Systems EngineeringComputer Sciences
www.izmirekonomi.edu.tr
Taxable Income and Income Taxes
Gross IncomeExpenses Cost of goods sold (revenues) Depreciation Operating expensesTaxable incomeIncome taxes
Net income
Item
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Example 8.8- Net Income Calculation
Item Amount
Gross income (revenue) $50,000
Expenses
Cost of goods sold
Depreciation
Operating expenses
20,000
4,000
6,000
Taxable income 20,000
Taxes (40%) 8,000
Net income $12,000
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Capital Expenditure versus Depreciation Expenses
01 2 3 4 5 6 7 8
0 87673 41 2
$4,000
$6,850$4,900
$3,500 $2,500 $2,500 $2,500$1,250
$28,000
Capital expenditure(actual cash flow)
Allowed depreciation expenses (not cash flow)
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Cash Flow vs. Net Income
Net income: Net income is an accounting means of measuring a firm’s profitability based on the matching concept. Costs become expenses as they are matched against revenue. The actual timing of cash inflows and outflows are ignored.
Cash flow: Considering the time value of money, it is better to receive cash now than later, because cash can be invested to earn more money. So, cash flows are more relevant data to use in project evaluation.
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Why Do We Use Cash Flow in Project Evaluation?
Company A Company B
Year 1 Net income
Cash flow
$1,000,000
1,000,000
$1,000,000
0
Year 2 Net income
Cash flow
1,000,000
1,000,000
1,000,000
2,000,000
Example: Both companies (A & B) have the same amount ofnet income and cash sum over 2 years, but Company A returns $1 million cash yearly, while Company B returns $2 millionat the end of 2nd year. Company A can invest $1 million in year1, while Company B has nothing to invest during the same period.
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Example 8.9 – Cash Flow versus Net Income
Item Income Cash Flow
Gross income (revenue $50,000 $50,000
Expenses
Cost of goods sold
Depreciation
Operating expenses
20,000
4,000
6,000
-20,000
-6,000
Taxable income 20,000
Taxes (40%) 8,000 -8,000
Net income $12,000
Net cash flow $16,000
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Net income versus net cash flow
$0
$50,000
$40,000
$30,000
$20,000
$10,000
$8,000
$6,000
$20,000
Net income
Depreciation
Income taxes
Operating expenses
Cost of goods sold
Netcash flow
Grossrevenue
$4,000
$12,000
Net cash flows = Net income + non-cash expense (depreciation)
