Profit Is Opinion Until Cash Confirms It
Distinguish accrual profit from operating cash flow when assessing earnings quality.
Net income reports performance; operating cash flow tests conversion. Accruals create useful timing differences Revenue and expenses are recognized when the accounting framework says the economic activity occurred, not necessarily when cash moved. That makes earnings more informative than a raw bank statement, but it also makes earnings dependent on estimates and timing. Operating cash flow is the conversion test The operating section translates income statement performance into cash generated by core business activities. If earnings rise while operating cash flow falls, do not immediately reject the earnings. Ask what changed in receivables, inventory, payables, deferred revenue, and other operating…
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