Answer Happy

Income is based on accruals, net income is determined rely on estimates, deferrals, allocations, and valuations. But Cash flows are more objective then net income. So for this reason, we often relate cash flows from operations to net income in assessing its quality. If the ratio of cash flows from operations divided by net income is greater, we consider the earnings quality if relatively higher. We can use Cash flows from operations to check the quality of net income. Below is the OCF and NI's presence for different company in different industry. Operating Cash Flows and Net Income Operating cash flows Net income 12,000 10,000 8,000 6,000 4,000 2,000 0 Dell Inc. FedEx Target Johnson & Procter & Corp. Johnson Gamble Required: Which company has the highest quality of earnings and which one has the lowest. And indicate the reasons for each company. $ Millions