Capital budgeting analysis not only requires the evaluation of cash flows but also requires the understanding of the origin of those cash flows. Based on your understanding of cash flows in a firm, complete and answer the following questions: Which of the following is a reason cash flows may differ from accounting income? The total number of units sold will be different for accounting income and cash flows. Depreciation is a tax-deductible expense but is not a cash outlay.

A reason cash flows may differ from accounting income is depreciation is a tax-deductible expense but is not a cash outlay.

Capital budgeting analysis is the process of determining the profitability of a project using the projected cash flows.

Types of capital budgeting analysis

Cash flow in the sum of depreciation and accounting income. While, accounting income does not include deprecation. For example, if net income is $10,000, deprecation is $2000, cash flow is $12,000.

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The reason cash flows may differ from accounting income is, for example:

Depreciation is a tax-deductible expense but is not a cash outlay.

Explanation:

Cash flows are transactions that involve the inflow or outflow of cash.  For example, with depreciation expense, the cash outlay could have taken place before, when the asset was initially purchased.  But, when the asset is put to use, the depreciation cost is deducted from the accounting income.  This implies that there will no longer be any cash flowing out of the business during the periods the asset's cost is being written off as an expense.

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