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Cash Flow is a Fact: Net Income is Just an Opinion


Pablo Fernandez


University of Navarra - IESE Business School

November 4, 2013


Abstract:     
La versión española de este artículo se puede encontrar en: http://ssrn.com/abstract=1182255.

We use three different definitions of cash flow: equity cash flow (ECF), free cash flow (FCF) and capital cash flow (CCF). We also answer to the question: When net income is equal to the equity cash flow? When making projections, dividends and other payments to shareholders forecasted must be exactly equal to expected equity cash flows.

May a company have positive net income and negative cash flows? Of course: one has only to think of the many companies that file for voluntary reorganization after having a positive net income. This is precisely what happens to the company AlphaCommerce that we show as an example.

A company's net income is a quite arbitrary figure obtained after assuming certain accounting hypotheses regarding expenses and revenues (.one of several that can be obtained, depending on the criteria applied). However, the ex-post cash flow is an objective measure, a single figure that is not subject to any personal criterion.

Number of Pages in PDF File: 10

Keywords: equity cash flow, free cash flow, capital cash flow, net income

JEL Classification: G12, G31, M21, M41

working papers series


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Date posted: September 25, 2002 ; Last revised: November 24, 2013

Suggested Citation

Fernandez, Pablo, Cash Flow is a Fact: Net Income is Just an Opinion (November 4, 2013). Available at SSRN: http://ssrn.com/abstract=330540 or http://dx.doi.org/10.2139/ssrn.330540

Contact Information

Pablo Fernandez (Contact Author)
University of Navarra - IESE Business School ( email )
Camino del Cerro del Aguila 3
28023 Madrid
Spain
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)
HOME PAGE: http://web.iese.edu/PabloFernandez/
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