accruals - profits than earnings because a company can show...

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There are different ways to calculate accruals by different researchers. Some use the difference between net income and operating cash flow, and some use the difference between operating income and operating cash flow. Operating income = EBIT (earnings before interest and tax), is an indicator of a company's profitability. EBIT is all profits before taking into account interest payments and income taxes. An important factor contributing to the use of EBIT instead of net income is the way in which it nulls the effects of the different capital structures and tax rates used by different companies. By excluding both taxes and interest expenses, the figure hones in on the company's ability to profit and thus makes for easier cross-company comparisons. Operating cash flow is the cash generated from the operations of a company (through the running of the business), which is a better measure of a business's
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Unformatted text preview: profits than earnings because a company can show positive net earnings (on the income statement) and still not be able to pay its debts. Both operating income and operating cash flow are better indicators of a companys profitability, therefore, comparing the two gives a better comparability and more reasonable results than comparing total net income and operating cash flow. In order to compare accruals between companies with different sizes, we divide the difference between operating income and operating cash flow by the beginning balance of the flowing years total asset (which is the ending balance of the present years total asset), because all else equal, the difference between operating income and operating cash flow should be larger for a large company than for a small company....
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