Q22Q. - Intermediate Accounting (Kieso)

Question

The net income for the year for Genesis, Inc. is \(750,000, but the statement of cash flows reports that the net cash provided by operating activities is \)640,000. What might account for the difference?

Step-by-Step Solution

Answer

Net income reported by the business entity is higher than the net cash from operating activities because of large credit sales and higher payments to accounts payable. 

Definition of Cash Basis of Accounting

The accounting method of reporting all the financial information that includes the cash flow either inward or outward is known as the cash basis of accounting. Non-cash transactions are not included in this method of accounting.

Reason for Difference between the Net Income and Cash Provided by Operating Activities

There are two reasons for the difference between the net income and the net cash from operation:

1. Higher credit sales or increase in receivables.
2. Repayment of accounts payable or reduction in payables.

Higher credit sales will increase the net income of the business entity and will not affect the cash from operations. The reduction in payables will reduce the money from the process and will not affect the net income of the business entity.