CFA CFA Level 2 Net income greater than cash flow from operations

Net income greater than cash flow from operations

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    • SbS
      Participant
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      Net income being greater than cash flow from operations may indicate aggressive accrual accounting policies that shift current expenses to future periods.

      Can somebody explain this statement?

    • Sophie Macon
      Keymaster
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      @SbS – if the ratio of CFO to Net Income is consistently below 1 it might be a signal of heavy use of accrual accounting, where expenses are being recognized later in the future to show greater net income today.

      This is a red flag to analysts as it indicates a low quality of earnings.

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