Fundamentals of Financial Management, Concise Edition
Fundamentals of Financial Management, Concise Edition
9th Edition
ISBN: 9781337087544
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Chapter 12, Problem 1Q
Summary Introduction

To explain: The reason to focus on cash flow instead of net income in capital budgeting.

Introduction:

Operating Cash Flow:

The amount of cash used in or generated from the operations of the business is reported under the category of operating cash flow in the statement of cash flow. This is prepared as a part of financial statement at the end of an accounting period. The net balance is calculated and depicted as net cash from operating activities.

Expert Solution & Answer
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Answer to Problem 1Q

Cash flow is used instead of accounting income because actual cash is required and spent for the projects or expansion plans of a company.

Explanation of Solution

  • The capital budgeting is a process to estimate the cash generated and used from a project or new plant.
  • The net income is just a measure of profitability and doesn’t reflect the actual cash that is available for investment.
Conclusion

So, the reason to consider cash flow is that actual cash is required and spent for the projects or expansion plans of a company.

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Fundamentals of Financial Management, Concise Edition

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