Jargon Junction: Income vs. Cash

Two weeks ago, in the first ever iteration of Jargon Junction, I defined the term balance sheet and provided a simple example of how this key financial statement can mislead accountants, analysts, and investors.

Applied mathematics: In season three of Industry a central plot element revolves around “the market” failing to decipher an investment bank’s opaque and unruly balance sheet. As you might imagine, financial shenanigans ensue.

In today’s edition I discuss the relationship between an income statement and a cash flow statement.

In the most literal sense, an income statement reflects a company’s net income, or net profit, or net earnings — these terms are used interchangeably. A streamlined version would look like this:

Net Revenue - Costs - Expenses - Taxes = Net Income

This isn’t exactly rocket science, but costs and expenses are subject to #AccountingBullshit and thus rarely reflect the performance of a company’s core business operations.

To be clear, financial reporting is deceptively complex and sometimes #AccountingBullshit serves a legitimate purpose. But, real talk, it’s mostly done to reduce a company’s tax liability.

As armchair financial analysts, the metric we should care about is called operating cash flow and is determined using my proprietary formula:

Net Income + Adjustment for Accounting Bullshit = Operating Cash Flow

Operating cash flow correlates strongly with “shareholder value” because it reveals how much actual money a company makes from running its core business.

To highlight just how widely these figures can vary, let’s compare net revenue, net income, and operating cash flow for a plucky little online bookstore called Amazon.com.

According to Amazon’s latest 10-K filing, the fledgling startup reported combined net revenues of $1.56 trillion during fiscal years 2021-23. And people say publishing is dead.

Over the same period, Amazon generated total net income of $61.1 billion, but booked total operating cash flow of $178.0 billion.

#AccountingBullshit created a relatively minor $117.0 billion discrepancy during the three-year window, which allowed the middling streaming service to pay a piddly $8.7 billion in corporate taxes while racing to a market capitalization of nearly $2.0 trillion.