Series 79 practice questionmediumFinancial Statement Analysis
An investment banker is reviewing a company's cash flow statement and notices that operating cash flow is significantly higher than net income. Which of the following is the most likely explanation?
- AThe company issued new equity during the period
- BThe company repurchased shares during the period
- CThe company had large non-cash charges such as depreciation and amortization✓ Correct answer
- DThe company made a significant acquisition
Explanation
Why C — The company had large non-cash charges such as depreciation and amortization
Non-cash charges like depreciation and amortization reduce net income on the income statement but do not represent actual cash outflows. When reconciling net income to operating cash flow using the indirect method, these charges are added back, resulting in operating cash flow exceeding net income. Share issuances and repurchases appear in the financing section of the cash flow statement, not the operating section.
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