QUESTION:

The topic for discussion this week is: Cash Flow and Taxes

1. How does net cash flow differ from net income and why is that difference relevant to financial decision making?

2. With regard to tax purposes, which type of depreciation methods do organizations prefer and why?

ANSWER:

1. How does net cash flow differ from net income and why is that difference relevant to financial decision making?

Net Cash flow if the direct result of cash from selling a good or service, it is immediate and available. It also considers the cost of the transaction, for example the outflow of cash used to produce the good or service.The net is the money immediately available once the transaction has concluded.Net income is a total earnings statement after the deduction of taxes, depreciation, etc, it considers more than cash to come to the final number or bottom line.Per our lecture, shareholders are more concerned with net cash flow, I assume because this is cash that can be used immediately and perhaps be converted into bonuses and incentives that are later deducted from the company's 'operating expenses'.Decisions made in regards to net cash flow can be immediate and short term, whereas decisions making based on net income, factor in more options before a decision is made.Does the company have the cash flow to give an employee an impromptu incentive for a job well done? Or do they have the overall net income to support a new project next year.

2. Regarding tax purposes, which type of depreciation methods do organizations prefer and why?

Per our reading - Firms prefer the accelerated depreciation method for tax purposes because it allows the firm to write off larger amounts of the cost of an asset over a shorter period. I think this maximizes income in the beginning however, it appears that the asset would have to be purchased more often to make up for the corporation, not being able to write it off over a longer period. I think the depreciation method used is dependent on the type of organization and the size as well as the type of assets they use