They are used to pay off overdrafts, trade payables, loan interest and tax balances (i.e. ![]() These include inventory, receivables and cash (i.e. In summary management have various liquid assets at their disposal that they can use to settle their debts in the short term. To reflect this, one of the key measures of the health of a business is solvency or liquidity. So a business can at the same time be profitable but have no cash left to pay its suppliers.įor this reason it is important that users of the financial statements can assess the cash position of a business at the end of the year but also how cash has been used and generated by the business during the accounting period.Īs mentioned above, cash flow is vital to the survival of a company both in the long and the short term. There are also a number of expenses that are recognised that have no cash impact depreciation is a good example of this. The same can be said of credit purchases. Most goods and services are sold on credit so at the point of sale revenue is recognised but no cash is received. Profits (from the income statement) are calculated on the accruals basis. The main reason for this problem is that profit is not the same as cashflow. If they could not pay their debts they would be put into administration or liquidated. ![]() To achieve this they need cash to be able to pay their debts. Whilst a business might be profitable this does not mean they will be able to survive. The Statement of Cash Flows The difference between profit and cash 1.4 Format of a statement of cash flows. ![]() 1.1 The difference between profit and cash.
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