The purpose of this paper is to analyze the differences between cash flow and net income comparing two years of functioning of the company in 2008 and 2009. The first line of the table is an illustration of the fact that net income raised by 1.3 in 2009 about the previous year. The reasons and the consequences of the diverse results are to be investigated in this work.
It can be observed that there are no significant changes in expenditures concerning amortization or taxes. In this case, it is possible to assume that external factors like governmental politics or the level of inflation did not play a crucial role in the variations in net income (Garcia & Guerreiro, 2016). However, there is a noticeable difference in the expenditures of receivables. In 2009 it grew by four times compared to the previous year. On the one hand, the reason for it may be related to the modifications in the economic system in the state. On the other hand, it is necessary to point out that it may be the consequence of the inefficient allocation of resources in the company.
It is important to mention that several indicators of cash flow have a lower rating in 2009 than in 2008. For example, investment activities were cut in half in 2009 compared to 2008. It may be presumed that investing operations were not beneficial for the organization and its reduction in cash flow helped to achieve better results for net income. Nevertheless, the additional expenditures on equipment were the same during the two investigated years with a slight increase in 2009.
Financial activities also have to be analyzed to provide an overview of the difference between net income and cash flow. The expenditures concerning treasury stock and dividends are higher in 2009. It is crucial to mention the significant changes in net financing activities. In 2008 this rate was negative, while in 2009, it is profitable: the difference between the metrics is more than 400,000 $. It is possible to notice that this can be related to short-term and long-term borrowings which also increased dramatically in 2009 and influenced the rate of net financing activities.
The final results of the table show a general overview of the situation. The difference between the beginning and ending cash balances in 2009 is an illustration of the successful operating as the profit was more than 100,000 $. The inverse situation can be observed in 2008, where the beginning balance is 200,000 $ higher than the ending one. The diversity of the rates in cash should also be taken into account: the increase in 2009 amounted to 110,110 $ while the decrease in 2008 was 213,197 $.
Examined statistics lead to the conclusion that the difference between net income and cash flow is the result of the impact of several factors. For example, the strategy in investment activities has significantly changed as the rates in 2009 were twice lower than in 2008. Financing activities also play an important role as their indicators were negative in the first year and positive in the last one. In general, it is possible to assume that the direction of growth and development of the organization was revised that caused such crucial differences. The influence of external factors is hard to be investigated because not enough information is provided in the table. However, the rise of net income can be related to the redistribution of cash flow towards fixed costs and improvement of the economic situation of the company.
Reference
Garcia, M. T. M., & Guerreiro, J. P. S. M. (2016). Internal and external determinants of banks’ profitability. Journal of Economic Studies, 43(1), 90–107.