Question

5. Describe negative within-firm externalities as they pertain to cash flow versus accounting income.

Answer 1

Cash flow is a better way to know the health of a company because cash flows are  better measure of economic viability as compared to accounting profits pertains to accounting ambiguities in determining net profits.

Cash flow statement gives the net difference between cash in flows and cash outflows.

Thus, different net profits may be arrived at under different accounting practices and procedures. But, there will be only one set of cash flow associated with the project. The cash flow approach, thus, avoids the accounting ambiguities and is a better measure as compared to the accounting profit approach

It may, sometimes amount to only paper profits if the revenue (sale) is not realised. Therefore, from the view point of investment analysis, the cash flow approach is the only appropriate method.