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Why aren’t a firm’s cash flows equal to its profits? Why is it important to keep...

  1. Why aren’t a firm’s cash flows equal to its profits? Why is it important to keep up with cash separate from income? (4 points)

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Answer #1

Firm are not having cash flows equal to their profits because when cash flows are not considering various factors like non operating expenses like interest expenses and depreciation expenses. These expenses are considered while arriving at the profit for the company. These factors are to be considered so there will be a difference in valuation of overall net cash flows that is accrued to the firm and the overall profits which is accrued to the firm.

it is important to keep up with cash separate from income because cash flows are generally an indication for long term sustainability of the business and it is also reflected into to various project accounting and it is also used for borrowers to issue loans and income is non sustainable figure and it can never be relied upon for a longer perspective.

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