Question

Austin Financial recently announced that its net income increased sharply from the previous year, yet its net cash provided from operations declined. What could explain this performanceAC

Answer 1

Answer:

The companie's depreciation expense declined.

Explanation:

When depreciation expense declined it will result in decrease in general expenses and as a result income will increase.

Depreciation is added as.part of cash flow from operations, so as depreciation decreases the cash flow also decraeses.

A decrease in depreciation will result in net income increase from the previous year, and net cash provided from operations will decline.

Answer 2

Answer:

There are two possible explanations for this situation:

1. sales revenue increased sharply, but most of the sales were made on credit, so accounts receivable increased. If accounts receivable increases too much, the company's net cash flow doesn't increase, it decreases. E.g. f the company decided to sell more on credit, then this year's cash flow might be negatively affected, since the cash inflows will take place in the next accounting period.
2. depreciation expense decreased a lot. When you are calculating a company's net cash flows, depreciation expense is first subtracted at the beginning, but is later added at the end because it lowers taxes but it doesn't represent a cash outflow. If depreciation decreases too much, then the net cash flow might also decrease. E.g. if instead of purchasing new equipment the company decides to lease it, then the net cash flows will decrease because lease payments are expenses which result in cash outflows.