The document discusses the differences between cash flow statements and income statements. Cash flow statements record when cash is received and spent, while income statements record when revenue is earned and expenses are incurred. There can be differences between a company's cash balance and net profit because some transactions only impact one statement. For example, a company can report an increase in net profit but a decrease in cash if it made credit sales or incurred expenses that were not paid in cash.

1. 12.2
CASH VS. PROFIT

2. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
12.2 CASH VS. PROFIT
440
489 493
105
703
893
979
-
100
200
300
400
500
600
700
800
900
1,000
1994 1995 1996 1997 1998 1999 2000
Enron Net Profit ($m)
Went bankrupt in 2001…

3. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
12.2 CASH VS. PROFIT
1,255
975
1,699
2,369
3,260
3,941
4,192
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
2001 2002 2003 2004 2005 2006 2007
Lehman Brothers Net Profit ($m)
Went bankrupt in 2008…

4. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 There is a difference between cash balance and profit:
Cash balance = Cash inflows -- Cash outflows
Profit =
Revenues
Earned --
Expenses
Incurred
12.2 CASH VS. PROFIT

5. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Hence, there is a difference between the Cash Flow Statement and the
Income Statement
Cash Flow Statement Income Statement
Cash inflows
-- Cash outflows
=
Net  or  in
cash
Revenues
Earned
--
Expenses
Incurred
= Net Profit (Loss)
12.2 CASH VS. PROFIT

6. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 This means there will be differences between a firm’s cash balance and its
profit for the period… Example: on 1 April…
 Your parents give you $100 in advance to mow the lawn 10 times in the future
 You fill your car up with $50 fuel (will provide 500km of travel)
 You paid your monthly gym membership of $30 which gives you 10 sessions
$100
10/ = $10 per lawn
$50
500/ = $0.10 per km
$30
10/ = $3 per session
12.2 CASH VS. PROFIT

7. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 On 1 April you…
 Received $100 to mow 10 lawns…
but haven’t mowed any lawns yet
 Paid $50 to put fuel providing
500km of travel… but haven’t
travelled anywhere yet
 Paid $30 for that month’s gym
membership… but haven’t been to
the gym yet
Cash Flow
Statement
Income
Statement
Revenues
Earned
--
Expenses
Incurred
Net Profit/
Loss
=
Cash
Inflows
--
Cash
Outflows
Net  or 
in Cash
=
$0
$0
$0
$100
$80
$20
12.2 CASH VS. PROFIT

8. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 On 2 April you…
 Mowed 1 lawn and earned $10
 Drove 50km and used up $5 of
fuel
 Went to the gym and used up one
$3 gym session
Cash Flow
Statement
Income
Statement
Revenues
Earned
--
Expenses
Incurred
Net Profit/
Loss
=
Cash
Inflows
--
Cash
Outflows
Net  or 
in Cash
=
$10
$8
$2
$0
$0
$0
12.2 CASH VS. PROFIT

9. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 On 3 April you…
 Mowed 3 lawns and earned $30
 Drove 100km and used up $10 of
fuel
 Went to the gym and used up one
$3 gym session
Cash Flow
Statement
Income
Statement
Revenues
Earned
--
Expenses
Incurred
Net Profit/
Loss
=
Cash
Inflows
--
Cash
Outflows
Net  or 
in Cash
=
$30
$13
$17
$0
$0
$0
12.2 CASH VS. PROFIT

10. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Which business would you rather own?
Business A Business B
$5,000Cash sales $12,000
$12,000Credit sales $5,000
$1,000Receipts from debtors $4,000
$1,000Rent (unpaid) $3,000
$3,000Marketing (paid) $1,000
$4,000Wages (paid) $2,000
$4,000Payments to creditors $1,000
$2,000Electricity (unpaid) $4,000
Revenue
Expenses
Net Profit
-
=
Business A Business B
Revenue
Expenses
Net Profit
-
=
$17,000
$10,000
$7,000
$17,000
$10,000
$7,000
$5,000 $12,000
$12,000 $5,000
$1,000 $3,000
$3,000 $1,000
$4,000 $2,000
$2,000 $4,000
Cash Received
Cash Paid
Cash Balance
-
=
Cash Received
Cash Paid
Cash Balance
-
=
$6,000
$11,000
-$5,000
$16,000
$4,000
$12,000
$1,000 $4,000
$5,000 $12,000
$4,000 $1,000
$3,000 $1,000
$4,000 $2,000
12.2 CASH VS. PROFIT

11. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Next week each firm must make
a $6,000 loan repayment…
Revenue
Expenses
Net Profit
-
=
Business A Business B
$17,000
$10,000
$7,000
$17,000
$10,000
$7,000
Cash Received
Cash Paid
Cash Balance
-
=
$6,000
$11,000
-$5,000
$16,000
$4,000
$12,000
Which business
would you rather
own?
12.2 CASH VS. PROFIT

12. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 So there is a difference between the Cash Flow Statement and the
Income Statement…
Concerned with:
• When was
cash
received?
• When was
cash paid?
Concerned with:
• When was
revenue
earned?
• When were
expenses
incurred?
Cash Flow Statement
Cash
Inflows
--
Cash
Outflows
Net  or 
in Cash
=
Income Statement
Revenues
Earned
--
Expenses
Incurred
Net Profit
(Loss)
=
12.2 CASH VS. PROFIT

13. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Some transactions will only appear in the Cash Flow Statement (CFS)
 Some transactions will only appear in the Income Statement
 Some transactions will appear in BOTH
Cash Flow Statement Income Statement
Includes…
Cash
transactions
Cash
transactions
AND…
Non-cash
transactions
Go in both
12.2 CASH VS. PROFIT

14. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
Transaction
Cash Flow
Statement
Income
Statement
Cash sales
Credit sales
Cost of sales
Expenses paid for in cash
Expenses incurred on credit
Receipts from debtors
Payments to creditors
Capital contributions of cash
Drawings of cash





 











12.2 CASH VS. PROFIT

15. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
Transaction
Cash Flow
Statement
Income
Statement
GST collected
GST paid
Discounts revenue/Discount expense
Interest revenue/Interest expense
Money borrowed from a bank (loans)
Loan repayments
Asset purchases for cash
Stock gain/loss


 










 
12.2 CASH VS. PROFIT

16. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 How can a firm record a decrease in Cash during the period but an increase in
Net Profit?
 Net ProfitNet  in Cash
Item Impact on Cash
Balance
Impact on Net
Profit
Credit sales made but cash not collected from debtors Nil 
Payments made to creditors from previous periods  Nil
The firm paid its GST settlement  Nil
The firm purchased non-current assets with cash  Nil
Loan repayments are made  Nil
The owner made substantial cash drawings  Nil
The firm recorded a stock gain and discount revenue Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
Credit sales made but cash not collected from debtors Nil 
Payments made to creditors from previous periods  Nil
The firm paid its GST settlement  Nil
The firm purchased non-current assets with cash  Nil
Loan repayments are made  Nil
The owner made substantial cash drawings  Nil
The firm recorded a stock gain and discount revenue Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
Credit sales made but cash not collected from debtors Nil 
Payments made to creditors from previous periods  Nil
The firm paid its GST settlement  Nil
The firm purchased non-current assets with cash  Nil
Loan repayments are made  Nil
The owner made substantial cash drawings  Nil
The firm recorded a stock gain and discount revenue Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
Credit sales made but cash not collected from debtors Nil 
Payments made to creditors from previous periods  Nil
The firm paid its GST settlement  Nil
The firm purchased non-current assets with cash  Nil
Loan repayments are made  Nil
The owner made substantial cash drawings  Nil
The firm recorded a stock gain and discount revenue Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
Credit sales made but cash not collected from debtors Nil 
Payments made to creditors from previous periods  Nil
The firm paid its GST settlement  Nil
The firm purchased non-current assets with cash  Nil
Loan repayments are made  Nil
The owner made substantial cash drawings  Nil
The firm recorded a stock gain and discount revenue Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
Credit sales made but cash not collected from debtors Nil 
Payments made to creditors from previous periods  Nil
The firm paid its GST settlement  Nil
The firm purchased non-current assets with cash  Nil
Loan repayments are made  Nil
The owner made substantial cash drawings  Nil
The firm recorded a stock gain and discount revenue Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
Credit sales made but cash not collected from debtors Nil 
Payments made to creditors from previous periods  Nil
The firm paid its GST settlement  Nil
The firm purchased non-current assets with cash  Nil
Loan repayments are made  Nil
The owner made substantial cash drawings  Nil
The firm recorded a stock gain and discount revenue Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
Credit sales made but cash not collected from debtors Nil 
Payments made to creditors from previous periods  Nil
The firm paid its GST settlement  Nil
The firm purchased non-current assets with cash  Nil
Loan repayments are made  Nil
The owner made substantial cash drawings  Nil
The firm recorded a stock gain and discount revenue Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
Credit sales made but cash not collected from debtors Nil 
Payments made to creditors from previous periods  Nil
The firm paid its GST settlement  Nil
The firm purchased non-current assets with cash  Nil
Loan repayments are made  Nil
The owner made substantial cash drawings  Nil
The firm recorded a stock gain and discount revenue Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
Credit sales made but cash not collected from debtors Nil 
Payments made to creditors from previous periods  Nil
The firm paid its GST settlement  Nil
The firm purchased non-current assets with cash  Nil
Loan repayments are made  Nil
The owner made substantial cash drawings  Nil
The firm recorded a stock gain and discount revenue Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
Credit sales made but cash not collected from debtors Nil 
Payments made to creditors from previous periods  Nil
The firm paid its GST settlement  Nil
The firm purchased non-current assets with cash  Nil
Loan repayments are made  Nil
The owner made substantial cash drawings  Nil
The firm recorded a stock gain and discount revenue Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
Credit sales made but cash not collected from debtors Nil 
Payments made to creditors from previous periods  Nil
The firm paid its GST settlement  Nil
The firm purchased non-current assets with cash  Nil
Loan repayments are made  Nil
The owner made substantial cash drawings  Nil
The firm recorded a stock gain and discount revenue Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
Credit sales made but cash not collected from debtors Nil 
Payments made to creditors from previous periods  Nil
The firm paid its GST settlement  Nil
The firm purchased non-current assets with cash  Nil
Loan repayments are made  Nil
The owner made substantial cash drawings  Nil
The firm recorded a stock gain and discount revenue Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
Credit sales made but cash not collected from debtors Nil 
Payments made to creditors from previous periods  Nil
The firm paid its GST settlement  Nil
The firm purchased non-current assets with cash  Nil
Loan repayments are made  Nil
The owner made substantial cash drawings  Nil
The firm recorded a stock gain and discount revenue Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
Credit sales made but cash not collected from debtors Nil 
Payments made to creditors from previous periods  Nil
The firm paid its GST settlement  Nil
The firm purchased non-current assets with cash  Nil
Loan repayments are made  Nil
The owner made substantial cash drawings  Nil
The firm recorded a stock gain and discount revenue Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
Credit sales made but cash not collected from debtors Nil 
Payments made to creditors from previous periods  Nil
The firm paid its GST settlement  Nil
The firm purchased non-current assets with cash  Nil
Loan repayments are made  Nil
The owner made substantial cash drawings  Nil
The firm recorded a stock gain and discount revenue Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
Credit sales made but cash not collected from debtors Nil 
Payments made to creditors from previous periods  Nil
The firm paid its GST settlement  Nil
The firm purchased non-current assets with cash  Nil
Loan repayments are made  Nil
The owner made substantial cash drawings  Nil
The firm recorded a stock gain and discount revenue Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
Credit sales made but cash not collected from debtors Nil 
Payments made to creditors from previous periods  Nil
The firm paid its GST settlement  Nil
The firm purchased non-current assets with cash  Nil
Loan repayments are made  Nil
The owner made substantial cash drawings  Nil
The firm recorded a stock gain and discount revenue Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
Credit sales made but cash not collected from debtors Nil 
Payments made to creditors from previous periods  Nil
The firm paid its GST settlement  Nil
The firm purchased non-current assets with cash  Nil
Loan repayments are made  Nil
The owner made substantial cash drawings  Nil
The firm recorded a stock gain and discount revenue Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
Credit sales made but cash not collected from debtors Nil 
Payments made to creditors from previous periods  Nil
The firm paid its GST settlement  Nil
The firm purchased non-current assets with cash  Nil
Loan repayments are made  Nil
The owner made substantial cash drawings  Nil
The firm recorded a stock gain and discount revenue Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
Credit sales made but cash not collected from debtors Nil 
Payments made to creditors from previous periods  Nil
The firm paid its GST settlement  Nil
The firm purchased non-current assets with cash  Nil
Loan repayments are made  Nil
The owner made substantial cash drawings  Nil
The firm recorded a stock gain and discount revenue Nil 
12.2 CASH VS. PROFIT

17. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 How can a firm record an increase in Cash during the period but a decrease in
Net Profit?
 Net ProfitNet  in Cash
Item Impact on Cash
Balance
Impact on Net
Profit
The firm records low credit sales but large collections
from debtors
 
A high level of expenses are put on credit but have not
yet been paid
Nil 
The firm received a GST settlement  Nil
Sale of non-current assets for cash  Nil
The firm takes out a loan  Nil
Owner makes a capital contribution  Nil
The firm recorded a stock loss and discount expense Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
The firm records low credit sales but large collections
from debtors
 
A high level of expenses are put on credit but have not
yet been paid
Nil 
The firm received a GST settlement  Nil
Sale of non-current assets for cash  Nil
The firm takes out a loan  Nil
Owner makes a capital contribution  Nil
The firm recorded a stock loss and discount expense Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
The firm records low credit sales but large collections
from debtors
 
A high level of expenses are put on credit but have not
yet been paid
Nil 
The firm received a GST settlement  Nil
Sale of non-current assets for cash  Nil
The firm takes out a loan  Nil
Owner makes a capital contribution  Nil
The firm recorded a stock loss and discount expense Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
The firm records low credit sales but large collections
from debtors
 
A high level of expenses are put on credit but have not
yet been paid
Nil 
The firm received a GST settlement  Nil
Sale of non-current assets for cash  Nil
The firm takes out a loan  Nil
Owner makes a capital contribution  Nil
The firm recorded a stock loss and discount expense Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
The firm records low credit sales but large collections
from debtors
 
A high level of expenses are put on credit but have not
yet been paid
Nil 
The firm received a GST settlement  Nil
Sale of non-current assets for cash  Nil
The firm takes out a loan  Nil
Owner makes a capital contribution  Nil
The firm recorded a stock loss and discount expense Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
The firm records low credit sales but large collections
from debtors
 
A high level of expenses are put on credit but have not
yet been paid
Nil 
The firm received a GST settlement  Nil
Sale of non-current assets for cash  Nil
The firm takes out a loan  Nil
Owner makes a capital contribution  Nil
The firm recorded a stock loss and discount expense Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
The firm records low credit sales but large collections
from debtors
 
A high level of expenses are put on credit but have not
yet been paid
Nil 
The firm received a GST settlement  Nil
Sale of non-current assets for cash  Nil
The firm takes out a loan  Nil
Owner makes a capital contribution  Nil
The firm recorded a stock loss and discount expense Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
The firm records low credit sales but large collections
from debtors
 
A high level of expenses are put on credit but have not
yet been paid
Nil 
The firm received a GST settlement  Nil
Sale of non-current assets for cash  Nil
The firm takes out a loan  Nil
Owner makes a capital contribution  Nil
The firm recorded a stock loss and discount expense Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
The firm records low credit sales but large collections
from debtors
 
A high level of expenses are put on credit but have not
yet been paid
Nil 
The firm received a GST settlement  Nil
Sale of non-current assets for cash  Nil
The firm takes out a loan  Nil
Owner makes a capital contribution  Nil
The firm recorded a stock loss and discount expense Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
The firm records low credit sales but large collections
from debtors
 
A high level of expenses are put on credit but have not
yet been paid
Nil 
The firm received a GST settlement  Nil
Sale of non-current assets for cash  Nil
The firm takes out a loan  Nil
Owner makes a capital contribution  Nil
The firm recorded a stock loss and discount expense Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
The firm records low credit sales but large collections
from debtors
 
A high level of expenses are put on credit but have not
yet been paid
Nil 
The firm received a GST settlement  Nil
Sale of non-current assets for cash  Nil
The firm takes out a loan  Nil
Owner makes a capital contribution  Nil
The firm recorded a stock loss and discount expense Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
The firm records low credit sales but large collections
from debtors
 
A high level of expenses are put on credit but have not
yet been paid
Nil 
The firm received a GST settlement  Nil
Sale of non-current assets for cash  Nil
The firm takes out a loan  Nil
Owner makes a capital contribution  Nil
The firm recorded a stock loss and discount expense Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
The firm records low credit sales but large collections
from debtors
 
A high level of expenses are put on credit but have not
yet been paid
Nil 
The firm received a GST settlement  Nil
Sale of non-current assets for cash  Nil
The firm takes out a loan  Nil
Owner makes a capital contribution  Nil
The firm recorded a stock loss and discount expense Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
The firm records low credit sales but large collections
from debtors
 
A high level of expenses are put on credit but have not
yet been paid
Nil 
The firm received a GST settlement  Nil
Sale of non-current assets for cash  Nil
The firm takes out a loan  Nil
Owner makes a capital contribution  Nil
The firm recorded a stock loss and discount expense Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
The firm records low credit sales but large collections
from debtors
 
A high level of expenses are put on credit but have not
yet been paid
Nil 
The firm received a GST settlement  Nil
Sale of non-current assets for cash  Nil
The firm takes out a loan  Nil
Owner makes a capital contribution  Nil
The firm recorded a stock loss and discount expense Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
The firm records low credit sales but large collections
from debtors
 
A high level of expenses are put on credit but have not
yet been paid
Nil 
The firm received a GST settlement  Nil
Sale of non-current assets for cash  Nil
The firm takes out a loan  Nil
Owner makes a capital contribution  Nil
The firm recorded a stock loss and discount expense Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
The firm records low credit sales but large collections
from debtors
 
A high level of expenses are put on credit but have not
yet been paid
Nil 
The firm received a GST settlement  Nil
Sale of non-current assets for cash  Nil
The firm takes out a loan  Nil
Owner makes a capital contribution  Nil
The firm recorded a stock loss and discount expense Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
The firm records low credit sales but large collections
from debtors
 
A high level of expenses are put on credit but have not
yet been paid
Nil 
The firm received a GST settlement  Nil
Sale of non-current assets for cash  Nil
The firm takes out a loan  Nil
Owner makes a capital contribution  Nil
The firm recorded a stock loss and discount expense Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
The firm records low credit sales but large collections
from debtors
 
A high level of expenses are put on credit but have not
yet been paid
Nil 
The firm received a GST settlement  Nil
Sale of non-current assets for cash  Nil
The firm takes out a loan  Nil
Owner makes a capital contribution  Nil
The firm recorded a stock loss and discount expense Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
The firm records low credit sales but large collections
from debtors
 
A high level of expenses are put on credit but have not
yet been paid
Nil 
The firm received a GST settlement  Nil
Sale of non-current assets for cash  Nil
The firm takes out a loan  Nil
Owner makes a capital contribution  Nil
The firm recorded a stock loss and discount expense Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
The firm records low credit sales but large collections
from debtors
 
A high level of expenses are put on credit but have not
yet been paid
Nil 
The firm received a GST settlement  Nil
Sale of non-current assets for cash  Nil
The firm takes out a loan  Nil
Owner makes a capital contribution  Nil
The firm recorded a stock loss and discount expense Nil 
Item Impact on Cash
Balance
Impact on Net
Profit
The firm records low credit sales but large collections
from debtors
 
A high level of expenses are put on credit but have not
yet been paid
Nil 
The firm received a GST settlement  Nil
Sale of non-current assets for cash  Nil
The firm takes out a loan  Nil
Owner makes a capital contribution  Nil
The firm recorded a stock loss and discount expense Nil 
12.2 CASH VS. PROFIT

18. © Michael Allison, Trinity Grammar School.
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