After selling iPods for revenue of $20 and cost of $10, with a 40% tax rate, which statement is true?

After selling iPods for revenue of $20 and cost of $10, with a 40% tax rate, which statement is true?

• A. Net Income up by $6; CFO up by $6; Net Change in Cash up by $6.
• B. Net Income up by $6; CFO up by $16; Net Change in Cash up by $16.
• C. Net Income up by $12; CFO up by $12; Net Change in Cash up by $24.
• D. Net Income up by $6; CFO up by $2; Net Change in Cash up by $2.

Answer: (B)

The key idea is the difference between accrual net income and cash flow from operations due to timing of cash receipts and payments. Net income reflects profitability after tax on the sale, regardless of when cash moves. Here, revenue minus cost is 10, taxes at 40% of that = 4, so net income rises by 6. Cash flow from operations, however, depends on actual cash in and out. If the cost of goods sold was not paid in this period (for example, the inventory purchase was financed or paid earlier), there’s a cash inflow from the sale of 20 and a cash tax outlay of 4, giving CFO of 16. With no other cash activities, net change in cash also rises by 16. So net income up by 6; CFO up by 16; net change in cash up by 16. This aligns with the chosen statement.

The key idea is the difference between accrual net income and cash flow from operations due to timing of cash receipts and payments. Net income reflects profitability after tax on the sale, regardless of when cash moves. Here, revenue minus cost is 10, taxes at 40% of that = 4, so net income rises by 6. Cash flow from operations, however, depends on actual cash in and out. If the cost of goods sold was not paid in this period (for example, the inventory purchase was financed or paid earlier), there’s a cash inflow from the sale of 20 and a cash tax outlay of 4, giving CFO of 16. With no other cash activities, net change in cash also rises by 16. So net income up by 6; CFO up by 16; net change in cash up by 16. This aligns with the chosen statement.