Cash Flow Is a Fact: Net Income Is Just an Opinion
10 Pages Posted: 25 Sep 2002 Last revised: 2 Jun 2019
Date Written: May 28, 2019
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.
La versión española de este artículo se puede encontrar en: http://ssrn.com/abstract=1182255.
Keywords: equity cash flow, free cash flow, capital cash flow, net income
JEL Classification: G12, G31, M21, M41
Suggested Citation: Suggested Citation