1.2·6 min read
Profit Is Not Cash
Because of accrual accounting, a company can be profitable and still run out of cash. That gap is the whole reason the cash flow statement exists.
By the end you can
- ✓Explain why net income and cash differ
- ✓Trace a credit sale through the statements
Under , you book revenue when you earn it, not when you collect it. So profit and cash can move in opposite directions.
Worked example · A sale on credit
Given
- •You sell $100 of product on credit (customer pays later).
- •The product cost you $60, paid in cash.
Solution
- 1.Revenue +$100, COGS $60 -> up by ~$40 (pre-tax).
- 2.Cash, this instantYou paid $60 for the goods but collected $0. Cash is DOWN $60.
- 3.+$100 records the money owed to you.
Answer
Profitable on paper (+$40) yet cash fell $60. The receivable is the bridge - it captures earned-but-uncollected revenue.
Why the cash flow statement exists
The reconciles accrual profit back to actual cash, by undoing non-cash items and timing differences like that receivable. A business can be profitable and still go broke if cash never shows up.
Check yourself
A company books $100 of revenue on credit. Before any cash is collected, what happens?