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

10 Pages Posted: 25 Sep 2002 Last revised: 12 Oct 2017

Pablo Fernandez

University of Navarra - IESE Business School

Date Written: November 17, 2015

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.

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

JEL Classification: G12, G31, M21, M41

Suggested Citation

Fernandez, Pablo, Cash Flow Is a Fact: Net Income Is Just an Opinion (November 17, 2015). Available at SSRN: https://ssrn.com/abstract=330540 or http://dx.doi.org/10.2139/ssrn.330540

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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