Ch 2 Solutions - ANSWERS TO END-OF-CHAPTER QUESTIONS 2-4...

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ANSWERS TO END-OF-CHAPTER QUESTIONS 2-4 The emphasis in accounting is on the determination of accounting income, or net income, while the emphasis in finance is on net cash flow. Net cash flow is the actual net cash that a firm generates during some specified period. The value of an asset (or firm) is determined by the cash flows generated. Cash is necessary to purchase assets to continue operations and to pay dividends. Thus, financial managers should strive to maximize cash flows available to investors over the long run. Although companies with relatively high accounting profits generally have a relatively high cash flow, the relationship is not precise. A business’s net cash flow generally differs from net income because some of the expenses and revenues listed on the income statement are not paid out or received in cash during the year. The relationship between net cash flow and net income can be expressed as: Net cash flow = Net income + Non-cash charges - Non-cash revenues. The primary examples of non-cash charges are depreciation and amorti- zation. These items reduce net income but are not paid out in cash, so we add them back to net income when calculating net cash flow. Likewise, some revenues may not be collected in cash during the year, and these items must be subtracted from net income when calculating net cash flow. Typically, depreciation and amortization represent the largest non-cash
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This note was uploaded on 10/13/2010 for the course IUU ju7 taught by Professor M,m during the Spring '10 term at Abraham Baldwin Agricultural College.

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Ch 2 Solutions - ANSWERS TO END-OF-CHAPTER QUESTIONS 2-4...

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