What is the most accurate statement concerning net income versus cash flow?

The correct statement highlights that net income can be turned into a rough measure of cash flow by adding back non-cash expenses, such as depreciation. This is because net income is derived from the accrual accounting principle, which recognizes revenues and expenses when they are incurred, regardless of when cash is actually exchanged. As a result, certain accounting entries can affect net income without impacting actual cash flow.

Non-cash expenses, like depreciation, reduce net income but do not involve an outflow of cash. Adding these back helps in arriving at cash flow from operations, giving a clearer picture of the cash generating ability of an entity. This understanding is fundamental in finance, as it allows stakeholders to assess both the profitability and liquidity of an organization more effectively.

Additionally, this approach underscores the distinction between profit measured on an accrual basis and the actual cash available to the business. It provides clarity on the differences in how these two metrics reflect an organization’s financial performance.