Tag Archives: Cash Flow Statement

Why are cash and profit not the same?

Posted on May 29, 2011 | Leave a comment

There are many reasons why a businesses cash or bank balance are not the same as profit made by the business. Cash balance is calculated using cash received minus cash paid and added to any opening cash balance. Profit is calculated as revenue earned minus expenses incurred. In an accrual accounting system revenue is not the same as cash received and expenses are not the same as cash paid. These differences are further explained below.

Revenues that are not receipts
  • Credit sales
  • Discount revenue
  • Stock gain
  • Accrued revenue
Receipts that are not revenues
  • Receipts from debtors
  • GST received
  • Prepaid revenue
  • Capital cash contribution
  • Loan received
  • Sale of non-current asset
Expenses that are not payments
  • Cost of sales
  • Depreciation
  • Stock loss
  • Accrued expenses
Payments that are not expenses
  • Payments to creditors
  • GST Paid
  • Prepaid expenses
  • Cash drawings
  • Loan repayment
  • Purchase of non-current asset

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Cash Flow Statements

Posted on May 24, 2011 | Leave a comment

A Cash Flow Statement is a financial report that reports on cash inflows (cash recieved) and cash outflows (cash paid). It is different from a Statement of Receipts and Payments in that a Cash Flow Statement classifies cash flows into Operating, Investing and Financing activities.

Operating activities include all cash flows related to day-to-day trading activities. This includes cash sales, receipts from debtors, GST received, payments to creditors, GST paid and any payments for prepaid or accrued expenses.

Investing activities include all cash flows related to the purchase and sale of non-current assets.

Finanacing activities include all cash flows related to changes in the financial structure of the business. This means transactions that change loans and owners equity, for example paying or recieving loan principle or cash contributions or drawings by the owner.

Uses of the Cash Flow Statement

The Cash Flow Statement can be used:

  1. To aid decision-making about the busineses’ cash activities
  2. To identify whether the business is generating enough cash from its Operating activities
  3. To assess whether the business is meeting its budgeted cash requirements
  4. To assist in planing for future cash activities

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