Investors do not always take negative cash flow as a negative. For example, in 2018 Amazon showed a loss of $124 billion and a net cash outflow of $262 billion from investing activities. Yet during the same year, Amazon was able to raise a net $254 billion through financing. Why would investors and lenders be willing to place money with Amazon? For one thing, despite having a net loss, Amazon produced $31 billion cash from operating activities. Much of this was through delaying payment on inventories. Amazon’s accounts payable increased by $78 billion, while its inventory increased by $20 billion.
Another reason lenders and investors were willing to fund Amazon is that investing payments are often signs that a company growing. Assume that in 2018 Amazon paid almost $50 billion to purchase fixed assets and to acquire other businesses; this is a signal of a company that is growing. Lenders and investors interpreted Amazon’s cash flows as evidence that Amazon would be able to produce positive net income in the future. In fact, Amazon had net income of nearly $12 billion in 2019. Furthermore, Amazon is still showing growth through its statement of cash flows; it spent about $26 billion in fixed equipment and acquisitions.
INSTRUCTIONS: Choose a company for which to research the connection of net income to cash flows. Compare, contrast, and conclude the relationship or association between net income and cash flows. Identify if the relationship works in concert – that is, does net income indicate that cash inflows are higher or lower? OR are the two items totally unrelated?
Identify which of the two items [net income and cash flows (inflows and outflows)] correlate in the company which you research. Do the results tell a positive or negative view for the company? You should include excerpts of financial statements to support your company’s situation.
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