Cash flow is not identical to profits Describe how they may

Cash flow is not identical to profits. Describe how they may differ for expenses that include both cash expenses and credit expenses, and explain the underlying difference between cash flow and profits.

Solution

Cash flow is not identical to profits.

A profit is derived from deducting all expenses (Cash and non cash expenses) from the revenue and the final figure that company has earned. Whereas a cash flow shows the revenue from the cash reduced by the cash expenses only.

A profit is generally used in the finance world to see the overall performance of the company. Whereas the cash flow is prepared to check the operations parts of the company and how the company has manage its cash inflow and outflow.

A profit statement is used by the management of the organization and shareholders are more focused on the profit. Whereas the Cash flow statement is mostly used for the finanace purpose. The banks or financial institution studys the cash flow to decide wether to finance the debt or not.

Every company has both cash and non cash operations. The cash expenses includes wages cost, fixed cost, salaries, rent, electic bill etc. on the other hand there are also credit expenses like Raw material purchase on credit and they also have some other non cash expenses like Depriciation. In a cash flow we take the expenses of cash only. So if a comapny has huge cerdit expenses their cash flow statement will show huge cash as but on the other hand the profit statement will have very little profit as compared to cash flow as because profit statement includes both cash and non cash items.

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