Income Flows vs. Cash Flows
The text states, ''Over suf?ciently long time periods, net income equals cash in?ows minus cash out?ows, other than cash ?ows with owners'' (Wahlen, et al., 2015, p.110).
- Explain the accuracy of the above 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 5 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 5 years. Annual cash operating costs for insurance, taxes, and other items totaled $6,000 annually. At the end of the ?fth year, the owners sold the equipment for $22,000, instead of the $20,000 salvage value initially estimated.