Question

LO 3-2 3.15 Interpreting the Relation between Net Income and Cash! Flow from Operations. Three years of combined data for two firms follow (in millions). Firma Firm B Net income Cash flow from operations $ 996 3,013 $2,846 3,401 The two firms experienced similar growth rates in revenues during the three-year period. One of these firms is Accenture Ltd., a management consulting firm, and the other is Southwest Airlines, a provider of airline transportation services. Identify each firm and explain your reasoning

Answer 1

The difference between the net income and cash flow froThem operations is non cash expenses like depreciation on equipment and machinery, amortization expenses.

Amortization and depreciation are expenses which does not involve cash out flow.

For companies having huge amounts of non cash expenses like depreciation, amortization.... There will be more cash flow from operations even its net income is very low or negative.

Based on above information, Firm A have higher cash flow from operations even its net income is very low and this huge difference is due to non cash expenses like depreciation. South West Airlines is providing airline transportation services which has huge amount of depreciation expense on aeroplanes.

So firm A is South West Airlines and firm B is Accenture Ltd.