In reviewing Graceland Rock Company’s financial statements, you note that net income increased but cash flow from operations decreased from 2008 to 2009.

Required:

1. Explain how net income could increase for Graceland while cash flow from operations decreased. Your answer must include three illustrative examples.

2. Explain why cash flow from operations may be a good indicator of a firms “quality of earnings” when analyzed in conjunction with accrual-basis earnings.