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

Net income greater than cash flow from operations

Add A Reply
Login
  • Author
    Posts
    • Avatar of SbSSbS
      Participant
        09 Mar 2021 at 8:50 am
        Up
        4
        ::

        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?

        Zee Tan voted up
      • Avatar of Sophie MaconSophie Macon
        Keymaster
          10 Mar 2021 at 7:17 pm
          Up
          5
          ::

          @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.

      • Author
        Posts
      Viewing 1 reply thread
      • You must be logged in to reply to this topic.