ABC Company is engaged in the manufacturing of electronic equipment. The Company has reported net loss for the year 2013 but its Cash Flow Statement is showing a positive net cash flow. Being a student of Business Finance, you are required to discuss briefly the reasons behind the difference between net result of Income Statement and Cash Flow Statement.
cash flow is positive and overall there is loss because the cover head cost of the electronic is expensive and operational cost is high.
THE CASH FLOW STATEMENT
One of the quarterly financial information any in public traded company is required to disclose to the SEC and the public. The document provides collective data concerning all cash inflows a company receives from both its ongoing operations and outside investment source, as well as all cash outflows that pay for business activities and investments through a given quarter.
The difference between the net result reported in the Income Statement and the net cash flow shown in the Cash Flow Statement can be attributed to several factors. These differences arise from the different accounting principles and methods used in preparing both financial statements.
1. Accrual Accounting vs. Cash Accounting: The Income Statement is prepared using the accrual accounting method, which recognizes revenues and expenses when they are earned or incurred, regardless of when cash is received or paid. On the other hand, the Cash Flow Statement is prepared using the cash accounting method, which records cash inflows and outflows as they occur. As a result, timing differences between recognizing revenue or expenses and actually receiving or paying cash can create disparities between the two statements.
2. Non-cash Items: The Income Statement may include non-cash items such as depreciation, amortization, or non-cash expenses. These items are expenses that do not involve an actual outflow of cash. Even though these non-cash items affect the net result in the Income Statement, they do not impact the net cash flow in the Cash Flow Statement.
3. Working Capital Changes: The Cash Flow Statement reflects changes in working capital, including accounts receivable, accounts payable, and inventory. Changes in these working capital accounts can result in differences between net income and net cash flow. For example, if a company recognizes revenue for sales made on credit but has not yet collected the cash, it will show as an increase in accounts receivable on the balance sheet and will not directly impact cash flow.
4. Financing and Investing Activities: The Cash Flow Statement includes cash inflows and outflows from financing and investing activities, such as issuing or repurchasing shares, taking on or repaying loans, and buying or selling assets. These activities do not directly affect the net result reported in the Income Statement but have an impact on cash flows.
In summary, the differences between the net result in the Income Statement and the net cash flow in the Cash Flow Statement are primarily due to the accrual accounting method, non-cash items, changes in working capital, and the inclusion of financing and investing activities in the Cash Flow Statement. By analyzing these differences, investors and analysts can gain a better understanding of a company's financial performance and its sources and uses of cash.