EXERCISE 7–1 Your banker confides to you after looking at a number of financial statements that she is confused about the difference between two operating measures, net income and cash from operations.

Required:

a. Explain the purpose and significance of these two operating measures.

b. Several financial transactions or events follow. For each transaction or event, indicate whether it yields an increase (), decrease (), or no effect (NE) on each of the two measures.

EFFECT OF TRANSACTION/EVENT ON:
Net Cash from Income Operations 1. Sales of marketable securities for cash at more than their carrying value.
2. Sale of merchandise with deferred payments (one-half within one year and one-half after one year).
3. Reclassify noncurrent receivable as current receivable.
4. Payment of current portion of long-term debt.
5. Collection of an account receivable.
6. Recording the cost of goods sold.
7. Purchase of inventories on account (credit terms).
8. Accrual of sales commissions (to be paid at a later date).
9. Payment of accounts payable (resulting from purchase of inventory).
10. Provision for depreciation on a sales office.
11. Borrowing cash from a bank on a 90-day note payable.
12. Accrual of interest on a bank loan.
13. Sale of partially depreciated equipment for cash at less than its book value.
14. Flood damage to merchandise inventories (no insurance coverage).
15. Declaration and payment of a cash dividend on preferred stock.
16. Sale of merchandise on 90-day credit terms.
17. Provision for uncollectible accounts receivable.
18. Write-off of an uncollectible receivable.
19. Provision for income tax expense (to be paid the following month).
20. Provision for deferred income taxes (set up because depreciation for tax reporting exceeded depreciation for financial reporting).
21. Purchase of a machine (fixed asset) for cash.
22. Payment of accrued salary expense to employees.