How does net income affect the cash flow statement?

How does net income affect the cash flow statement?

• A. It is included in financing activities
• B. It is the first line of Operating Cash Flows
• C. It is ignored entirely
• D. It is taken from the Balance Sheet

Answer: (B)

Net income plays a critical role in the cash flow statement as it is the starting point for calculating Operating Cash Flows. This is because the cash flow statement is structured to reconcile net income from the income statement to net cash provided by operating activities. Thus, net income is adjusted for non-cash expenses and changes in working capital to arrive at the cash generated from operations. By beginning with net income, the cash flow statement effectively reflects the actual cash flow from the company's operations, despite the income statement presenting figures based on accrual accounting which may include non-cash items. Therefore, this alignment allows stakeholders to better understand the company’s liquidity and operational efficiency.

Net income plays a critical role in the cash flow statement as it is the starting point for calculating Operating Cash Flows. This is because the cash flow statement is structured to reconcile net income from the income statement to net cash provided by operating activities. Thus, net income is adjusted for non-cash expenses and changes in working capital to arrive at the cash generated from operations.

By beginning with net income, the cash flow statement effectively reflects the actual cash flow from the company's operations, despite the income statement presenting figures based on accrual accounting which may include non-cash items. Therefore, this alignment allows stakeholders to better understand the company’s liquidity and operational efficiency.