Discuss the Correlations That Have Been Found Between Net Income,net

question 88

Essay

Discuss the correlations that have been found between net income,net income plus or minus Type 1 adjustments (i.e.,adjustments to net income for revenues,expenses,gains,and losses that are recognized in income and are associated with changes in noncurrent assets,noncurrent liabilities,and shareholders' equity,but do not affect cash by the same amounts for the period),and cash flow from operations.
A. Daley, "Evidence on the Relationships Between Earnings and Various Measures of Cash Flow," Accounting Review (October, 1986)revealed (1)a high correlation between net income and net income plus or minus Type 1 adjustments, and (2)a low correlation between net income and cash flow from operations, and (3)a low correlation between cash flow from operations and net income plus or minus Type 1 adjustments over time

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Definitions:

Merchandise

Goods or products that are bought and sold in retail or wholesale in the business.

Sales Discounts

Reductions in the selling price offered to customers, often as an incentive to encourage prompt payment.

Cash Discount

A deduction from the total amount on an invoice allowed by a vendor to encourage prompt payment.

Accounts Receivable

The money owed to a business by its clients for goods or services delivered but not yet paid for.