IDEAS home Printed from https://ideas.repec.org/p/ebg/iesewp/d-0629.html
   My bibliography  Save this paper

Cash flow is cash and is a fact. Net income is just an opinion

Author

Listed:
  • Fernandez, Pablo

    () (IESE Business School)

Abstract

A company's profit after tax (or net income) is quite an arbitrary figure, obtained after assuming certain accounting hypotheses regarding expenses and revenues. On the other hand, its cash flow is an objective measure, a single figure that is not subject to any personal criterion. In general, to study a company's situation, it is more useful to operate with the cash flow (equity cash flow, free cash flow or capital cash flow) as it is a single figure, while the net income is one of several that can be obtained, depending on the criteria applied. Profit after tax (PAT) is equal to the equity cash flow when the company is not growing, buys fixed assets for an amount identical to depreciation, keeps debt constant, and only writes off or sells fully depreciated assets. Profit after tax (PAT) is also equal to the equity cash flow when the company collects in cash, pays in cash, holds no stock (this company's working capital requirements are zero), and buys fixed assets for an amount identical to depreciation. When making projections, the dividends and other forecast payments to shareholders must be exactly equal to expected equity cash flows.

Suggested Citation

  • Fernandez, Pablo, 2006. "Cash flow is cash and is a fact. Net income is just an opinion," IESE Research Papers D/629, IESE Business School.
  • Handle: RePEc:ebg:iesewp:d-0629
    as

    Download full text from publisher

    File URL: http://www.iese.edu/research/pdfs/DI-0629-E.pdf
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Negrea Laura Georgeta & Matis Dumitru & Mustata V. Razvan, 2011. "Cash Flow Reporting And Creative Accounting," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 597-602, December.

    More about this item

    Keywords

    Cash flow; Net income; Equity cash flow; Free cash flow; Capital cash flow;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ebg:iesewp:d-0629. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Noelia Romero). General contact details of provider: http://edirc.repec.org/data/ienaves.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.