Net income equals cash inflows minus cash outflows

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Reference no: EM131589720

‘‘Over suffciently long time periods, net income equals cash inflows minus cash outflows, other than cash flows with owners.’’ Demonstrate the accuracy of this statement in the following scenario: Two friends contributed $50,000 each to form a new business. The owners used the amounts contributed to purchase amachine for $100,000 cash. They estimated that the useful life of the machine was five years andthe salvage value was $20,000. They rented out the machine to a customer for an annual rental of $25,000 a year for five years. Annual cash operating costs for insurance, taxes, and other itemstotaled $6,000 annually. At the end of the fifth year, the owners sold the equipment for $22,000,instead of the $20,000 salvage value initially estimated. ( Hint: Compute the total net income and thetotal cash flows other than cash flows with owners for the five-year period as a whole. ) Please clearly explain the why.

Reference no: EM131589720

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