Why Can There Be a Substantial Difference Between Net Income

question 34

Multiple Choice

Why can there be a substantial difference between net income and free cash flow?

• A) Capital expenditures are not fully included in the net income calculation.
• B) Free cash flow includes accrual items not found in net income.
• C) Free cash flow does not deduct the same expense items as net income.
• D) Net income only flows to retained earnings, while free cash flow can be used to pay dividends.

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Definitions:

Equation of Exchange

A monetary theory equation that states the money supply multiplied by the velocity of money equals the price level times the quantity of goods and services sold (MV = PQ).

Interest Rate

The part of a loan that incurs interest fees for the borrower, customarily indicated as an annual percentage of the unpaid loan.

Discretionary Policies

Economic strategies, involving government spending and taxation, that are implemented at the discretion of the government to manage economic fluctuations.

Monetarist Economists

Economists who believe that variations in the money supply have major influences on national output in the short run and the price level over longer periods.