Net income is easily manipulated because of accrual accounting and the many estimates involved. On the other hand, cash flow is unaffected by estimates. However, firms can still manipulate the cash flow statement by misclassifying cash flows, ignoring cash flows, and managing cash flows.
As a result of its relationship to the income statement, net equity (which is generally an accumulation of earnings and losses less dividend payments to shareholders) is directly affected by the estimates used to determine the level of earnings.
