Over suffciently long time periods net income equals cash


‘‘Over suffciently 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 amachine for $100,000 cash. They estimated that the useful life of the machine was five years andthe 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 itemstotaled $6,000 annually. At the end of the fifth year, the owners sold the equipment for $22,000,instead of the $20,000 salvage value initially estimated. ( Hint: Compute the total net income and thetotal cash flows other than cash flows with owners for the five-year period as a whole. ) Please clearly explain the why.

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Financial Management: Over suffciently long time periods net income equals cash
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