TABLE OF CONTENTS There is a financial and accounting maxim which, although it is not absolutely true, comes very close to and is a good idea to remember: "Net income is just an opinion, but cash flow is a fact."
Still today, many analysts view net income as the key and only truly valid parameter for describing how a company is doing. According to this simple approach, if the net income increases, the company is doing better; if the net income falls, the company is doing worse. It is commonly said that a company that showed a higher net income last year "generated more wealth" for its shareholders than another company with a lower net income. Also, following the same logic, a company that has a positive net income "creates value" and a company that has losses "destroys value." Well, all these statements can be wrong.
Other analysts "refine" net income and calculate the so-called accounting cash flow, adding depreciation to the net income. [1] They then make the same remarks as in the previous paragraph but referring to "cash flow" instead of net income. Of course, these statements too may be wrong.
The classic definition of net income (revenues for a period less the expenses that enabled these revenues to be obtained during that period), in spite of its conceptual simplicity, is based on a series of premises that seek to identify which expenses were necessary to...
