Question

BTN 12-7 Review the chapter’s opener involving Amazon.com and its founder, Jeff Bezos.

Required

1. In a business such as Amazon, monitoring cash flow is always a priority. Even though Amazon now has billions in annual sales and sometimes earns a positive net income, explain how cash flow can lag behind net income.

2. Amazon is a publicly traded corporation. What are potential sources of financing for its future expansion?

Short answer

1. Cash flow lags behind the net income because of higher cash payments and lower cash collections.
2. Business entity can generate capital byissuing equity and debt securities.

Step-by-step solution

Definition of Net Income

Net income can be defined as the net benefits generated by the business entity over the expenses incurred. It is reported at the bottom of the income statement prepared by the business entity.

Cash lag behind net income

The cash flow of the business entity is lagging behind the net income because the income statement is prepared on the accrual accounting concept. At the same time, the cash flow statement is based on the cash basis of accounting.

The difference might exist because the percentage of cash expenses is higher than the percentage of cash sales made by the business entity. In other words, it can be said that the business entity is not collecting enough cash from the customer and, at the same time, paying a lot of cash for business expenses.

Potential source of financing for future expansion

The business entity can generate finance from the following source:

Equity Source: It includes the generation of capital by issuing common or preferred stock shares.

Debt financing: It includes issuing bonds and debentures for generating capital. It requires regular interest payment to the investors.