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In discussing your cost accounting class with friends, you describeed that you were currently studying methods of evaluating capital investments. You mentioned that most of these methods rely upon cash flow analysis. One particularly sophisticated friend was surprised to hear that these analyses used cash flows rather than accounting earnings. He said, "It seems to me that investors are only interested in accounting earnings and don't pay much attention to cash flows. In fact, you never hear market commentators talk about cash flow; they always talk about a firm's income and whether earnings will match investor and analyst expectations."

Provide a written explanation to your friend that provides the rationale for capital budgeting techniques focusing on cash flows rather than accounting earnings.

Accounting Basics, Accounting

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