Income Flows versus Cash Flows
The text states, "Overly sufficiently long time periods, net income equals cash inflows minus cash outflows, other than cash flows with owners". Demonstrate the accuracy of this statement in the following scenario: Two friends contributed 50,000 each to form a new business.
The owners used the amounts contributed to purchase a machine for 100,000 cash. They estimated that the useful life of the machine was five years and the salvage value was 20,000. They rented out the machine to a customer for an annual rental of 25,000 a year for five years.
Annual cash operating costs for insurance, taxes, and other items totaled 6,000 annually. At the end of the fifth year, the owners sold equipment for 22,000, instead of the 20,000 salvage value initially estimated. (Hint: Compute the total net income and the total cash flows other than cash flows with owners for the five-year period as a whole.)
You may want to present a table to support your conclusion. If so, please create the table in Excel and then cut and paste it to a word document with text explaining your answer.
Financial Reporting, Financial Statement Analysis, and Valuation, 8E Thomson Stickney, Brown and Wahlen,. ISBN-13: 978-1285190907