Sunday, August 22, 2010

What is the differences between cash flow and profit?

I am an A level student and the past paper want me to distinguish between cash flow and profit. Help needed. Ty very much

What is the differences between cash flow and profit?
You need to take a basic accounting course, but here's a quick example. You buy something for $100, and sell it to me for $200, but I can't pay you until January. The $200 goes into "accounts receivable". On paper you have a $200 profit, but -$100 cash flow because I haven't paid you yet. In the next period, you don't buy or sell anything, but collect my $200. You have a profit of $0, but a positive cash flow of $200. In larger companies, the major differences are due to accounts receivable and accounts payable variations, as well as capital equipment and depreciation. If I spend $50,000 on a machine that I expect to to last 10 years (different assets can be depreciated over different time frames), the $50,000 is considered a capital expense, and is not part of the profit/loss statement, but certainly affects cash flow. In future periods, you deduct depreciation expense on that machine, decreasing profit with no future effect on cash flow.


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