Question

Differences between net income and net cash provided by operating activities exist because:

1) net income is an estimate whereas cash from operating activities is an actual number.

2) net income is an actual number whereas cash from operating activities is an estimate.

3) accrual accounting recognizes revenue and income even when cash has not been received or paid.

4) net income includes capital expenditures, cash from operating activities does not.

Answer 1

The correct option is 3)accrual accounting recognizes revenue and income even when cash has not been received or paid.

Explanation : Statement of income statement is prepared according to accrual basis of accounting where Net income is calculated and Statement of cashflow from operating activities is prepared according to Cash basis of accounting where Net cash is calculated.

In Accrual basis of accounting revenues are recorded when they are earned. (Under the cash basis of accounting, revenues are recorded when the cash is received.) Under the accrual basis of accounting, expenses are recorded when the expense occurs (Under the cash basis of accounting the expenses is recorded when the cash is paid. Because of the method of accounting the difference arises.