Final answer:
Net income, based on revenue minus explicit costs, often differs from net cash provided by operating activities due to non-cash items like depreciation and changes in working capital. They are related but not the same, and differences can arise in either direction.
Step-by-step explanation:
The difference between net income and net cash provided by operating activities is a common point of confusion in financial reporting. Net income is the result of accounting profit, which is calculated as total revenue minus explicit costs, representing the amount of money brought in minus the money paid out. On the other hand, net cash provided by operating activities is concerned with the actual cash transactions involved in running the business, which includes adjustments for non-cash items such as depreciation and changes in working capital.
To clarify options provided in your question:
- They are not the same.
- Net income can be greater than net cash provided by operating activities when there are significant non-cash expenses reducing income that do not immediately affect cash flow.
- Conversely, net income can be less than net cash provided by operating activities if the company has strong cash flow from operations despite recording non-cash charges that reduce net income.
- Therefore, net income and net cash provided by operating activities often differ due to these accounting treatments.
Businesses pay income taxes based on their accounting profit, but their economic success is determined by their economic profit, which factors in both explicit and implicit costs.