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12.2 Cash vs Profit

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.

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

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12.2 Cash vs Profit

  • 1.
  • 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
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    © Michael Allison,Trinity Grammar School. Author’s permission required for external use TASK In-class Homework Supplemental question X