Abstract
This chapter discusses the differences between net income and cash flow. Net income is just an opinion, but cash flow is a fact. The equity cash flow (ECF) represents the cash available in a company for its shareholders that is to be used for dividends or share repurchases. The ECF corresponds to the concept of cash flow. The ECF in a period is the difference between all cash inflows and outflows during that period. Net income is also called “profit after tax” (PAT). When making projections, the ECF must be equal to the forecast dividends, and the forecast dividends must be exactly equal to the equity cash flow. A company's PAT is a quite arbitrary figure that is obtained after assuming certain accounting hypotheses regarding expenses and revenues. PAT is also equal to the equity cash flow when a company collects in cash, pays in cash, holds on stocks, and buys fixed assets for an amount identical to depreciation.
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