Does the amount of cash in the bank measure net income?

Answer 1

No. Cash can come from several sources - investors, bank loans, sales of assets (the firm's buildings, or equipment), payments from people who owe the firm money, etc. Likewise, it can go to several places - back to investors, to buy long-lived assets and pay suppliers, etc. Here are a couple of key difference between cash flow and net income (somewhat simplified): When a firm has expenditures that will have value for more than 1 year (i.e. to buy a new factory), this is treated as buying asset, so it does not effect income, but it will effect cash if that's how they paid. The expense from using the factory will be incurred as depreciation over its life. Even though the firm may have used cash to pay for it all up front, it only effects net income a little each year. Net income is difference between revenue and expenses. Revenue can only be recognized when goods are transferred or services rendered, but in the real world this usually doesn't coincide with cash in the bank (because sales are made on credit). Expenses must be recognized at the same time that sales are made. Here is an example to show this: A firm uses cash to purchase $100 of inventory in 2007 and delivers it to a customer at a selling price of $200 in in 2008. The customer finally pays the bill for it in 2009. In 2007, the firm spent $100 in cash, but has no expense for this transaction, because the inventory is still "on the books". It 2008, the firm made $100 of net income on this transaction ($200 revenue - $100 expense) even though no cash traded hands. In 2009, the firm has an extra $200 in the bank, but can not treat it as income because they did not earn the money in 2009 (instead, it is a decrease in accounts receivable). Hope this helps. No. Cash can come from several sources - investors, bank loans, sales of assets (the firm's buildings, or equipment), payments from people who owe the firm money, etc. Likewise, it can go to several places - back to investors, to buy long-lived assets and pay suppliers, etc. Here are a couple of key difference between cash flow and net income (somewhat simplified): When a firm has expenditures that will have value for more than 1 year (i.e. to buy a new factory), this is treated as buying asset, so it does not effect income, but it will effect cash if that's how they paid. The expense from using the factory will be incurred as depreciation over its life. Even though the firm may have used cash to pay for it all up front, it only effects net income a little each year. Net income is difference between revenue and expenses. Revenue can only be recognized when goods are transferred or services rendered, but in the real world this usually doesn't coincide with cash in the bank (because sales are made on credit). Expenses must be recognized at the same time that sales are made. Here is an example to show this: A firm uses cash to purchase $100 of inventory in 2007 and delivers it to a customer at a selling price of $200 in in 2008. The customer finally pays the bill for it in 2009. In 2007, the firm spent $100 in cash, but has no expense for this transaction, because the inventory is still "on the books". It 2008, the firm made $100 of net income on this transaction ($200 revenue - $100 expense) even though no cash traded hands. In 2009, the firm has an extra $200 in the bank, but can not treat it as income because they did not earn the money in 2009 (instead, it is a decrease in accounts receivable). Hope this helps.