Question

Which of the following is a reason cash flows may differ from accounting income? The total number of units sold will be different for accounting income and cash flows. Depreciation is a tax-deductible expense but is not a cash outlay. Which of the following best describes incremental cash flows? They are the difference between the cash flows the firm will have if it accepts the project versus the cash flows it will have if it rejects the project. Incremental cash flows are not relevant because they will occur whether or not the project is accepted.

Answer 1

Answer:

1. Depreciation is a tax-deductible expense but is not a cash outlay.

2. They are the difference between the cash flows the firm will have if it accepts the project versus the cash flows it will have if it rejects the project.

Explanation:

1. Depreciation as a non-cash outlay is removed from the Net Income when it is calculated for tax purposes. However, when calculating the Net Cash-flow, it is added back because the Cash-flow statement deals with how much actual money the business has and because depreciation does not actually take any money, it would need to be added back in the cash-flows as opposed to Accounting income where it is removed.

2. Incremental Cash-flows get their name from the fact that they will add income to a firm. This cash-flow comes if the company accepts a project as opposed to rejecting it and the cash they get from this increases their cash-flow making it incremental.