Question

Austin Financial recently announced that its net income increased sharply from the previous year, yet its net cash provided from operations declined. Which of the following could explain this performance?
a) The company’s dividend payment to common stockholders declined.
b) The company’s expenditures on fixed assets declined.
c) The company’s cost of goods sold increased.
d) The company’s depreciation expense declined.
e) The company’s interest expense increased.

Answer 1

Answer:

Option D) The company’s depreciation expense declined.

Explanation:

It happens  because when company´s depreciation decrease you have less cost of sales and an improvement in the Gross Margin and hence in the Net Income, but this enhancement in the Net Income has an opposite effect on Net Cash because less depreciation means less total cash,

Total Cash it's defined by Net Income plus Depreciation, a less Depreciation means less Net Cash.