“Over sufficiently long time periods, net income equals
cash inflows minus cash outflows, other than cash flows with owners.”
Demonstrate the accuracy of this statement in this scenario:
Two friends contribute $50,000 each to form a new business.
The owners used the amounts contributed to purchase a machine for $100,000
cash. They estimated that the useful life of the machine was five years and the
salvage value was $20,000. They rented out the machines to a customer for an
annual rental of $25,000 a year for five years. Annual cash operating costs for
insurance, taxes and other items totaled $6,000 annually. At the end of the
fifth year, the owners sold the equipment for $22,000, instead of the $20,000
salvage value initially estimated.
Compute the total net income and the total cash flows other
than cash flows with owners for the five-year period as a whole.
