Final answer:
A company can have a significant net income and negative net cash flows due to differences between accrual accounting and cash accounting, such as sales made on credit or significant cash expenditures that are capitalized and depreciated over time.
Step-by-step explanation:
It is indeed possible for a company to have significant net income while experiencing negative net cash flows during the same time period. This situation can arise due to the difference between cash accounting and accrual accounting. In accrual accounting, revenues and expenses are recorded when they are earned or incurred, not necessarily when cash changes hands. For example, if a company makes a large sale but allows the customer to pay on credit, it will record the revenue (contributing to net income) but will not receive the cash until later.
On the flip side, a company may have negative net cash flows due to significant cash expenses that do not immediately affect the income statement, such as capital expenditures or debt repayment. These large expenditures will reduce the company's cash balance but may not impact net income if the expenses are capitalized and depreciated over time.
Therefore, net income and net cash flows can indeed diverge within the same accounting period, illustrating the importance of understanding both the income statement and the cash flow statement when evaluating a company's financial health.