Profit is not cash flow, Financial Accounting

Profit is not cash flow:

Adequate cash is essential to keep business running. Inadequate cash increases the risk of not being able to meet current obligations as and when they arise which is dangerous to the company. There are many instances when businesses failed because of lack of cash flows even if they were profitable. Vice versa also hold good. Under accrual system of accounting net income (revenue less expenses) does not equate net positive cash flows. The difference is the timing of sale; expenses and profit do not coincide with their associated cash flows. Hence there is always a discrepancy between profit and net cash flow.

A statement of Cash Flows is an essential component of Financial Statements. As the profit and loss account and the balance sheet are prepared on accrual basis, the profits disclosed by the profit and loss account do not indicate the liquidity of the firm. A firm may be highly profitable but may find itself with hardly any cash or working capital to continue the operating cycle. On the contrary, a loss making firm may have sufficient cash flows. 

Posted Date: 8/29/2012 3:05:30 AM | Location : United States







Related Discussions:- Profit is not cash flow, Assignment Help, Ask Question on Profit is not cash flow, Get Answer, Expert's Help, Profit is not cash flow Discussions

Write discussion on Profit is not cash flow
Your posts are moderated
Related Questions
Q. What is Asset? Asset - An economic resource which is expected to be of benefit in the future. Probable futureeconomic benefits attained as a result of past transactions or e

Go to your assigned corporation's website and access their latest annual report. Answer the following questions regarding their derivative and foreign currency transactions. 1.

1. Would export businesses prefer a rising or declining dollar? Would it be the same for a European tourist on a budget and visiting the Grand Canyon? Explain your answer. 2. Wh

Answer both parts of this question. Each part is worth seven and a half marks each. (a) Describe the features of the Torrens Title system of land registration and compare them t

Steps in preparing the consolidated balance sheet Step 1 : Prepare the 3 important accounts i.e. cost of control to determine goodwill Group retained profits Mino

Q. Corporate Enterprise group? In order to have better and systematic participation of labour in management for improvement in working of Railway system and appropriate changes

Define reasons that influence a firm's degree of transaction exposure? What reasons influence a firm's degree of ‘transaction exposure' in a certain currency? For each reason d

In the current year, Madison Corporation had $50,000 of taxable income at a tax rate of 25%. During the year, Madison began offering warranties on its products and has a warranty l

How do I figure fair value of assets..2 year estimated useful life and indefinite life recognized by purchased company

Review - Accounting service which provides some assurance as to reliability of financial information. In a review, a CERTIFIED PUBLIC ACCOUNTANT (CPA) doesn't conduct an examinatio