There are various reasons as to why cash flows from operating activities differ from net income. Firstly, net income is the overall revenue from sales after deducting expenses, depreciation, cost of goods sold, interest expenses and taxes (Heakal, 2010). Conversely, cash flow from operating activities is the sum of the net income, changes in working capital and adjustments for noncash expenses. In calculating the net profit of the company, noncash expenses such as depreciation and amortization are deducted from the total revenue. However, these expenses don’t reduce the amount of cash a company generates. Therefore, they are added back to net income in the cash flow statement.
A cash flow statement provides the cash inflows and outflows from a company’s operation, investment, and financing activities (Epstein, 2014). Hence, investors are able to have a more transparent view of where a company’s money is coming from and where it is being spent within a specific accounting period. We can conclude that Techno made a higher accounting profit (net income) in 2009 than in 2008 which represents an increase of 30.5%.
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Analyzing the cash flows for 2008 and 2009, the statement shows that the total cash provided by operations reduced by 86.17% in 2009 largely because of the huge increase in receivables.
The cash flows from investing activities suggest that Techno spent less in investment activities in 2009 than in 2008. Moreover, the net cash flows from financing activities indicate a great increase from 2008 to 2009. This was as a result of not having any repayments of long-term borrowing in 2009 as the company made them in 2008. Consequently, there was an increase in net cash flow in 2009 while in 2008 the company recorded a decrease in net cash flow. However, the net income in both years was positive despite the difference in the net cash flow.
References
Epstein, L. (2014). Financial decision making: An introduction to financial reports [Electronic version]. Retrieved from: https://content.ashford.edu/.
Heakal, R. (2010, May). What is a cash flow statement? (Links to an external site. Forbes. Retrieved from: http://www.forbes.com/2010/05/27/cash-flow-statement-personal-finance-securities-analysis.html
