What Is the Difference Between Cash Assessment & Profitability Assessment?

Cash is the money the firm can disburse without any restrictions, and users of financial statements assess cash from the statement of cash flows. Profit is the amount by which revenues exceed expenses, and it indicates a company’s performance in a financial period as shown in an income statement. The difference in assessment of cash and profitability arises due to the use of accrual accounting in the determination of profits as opposed to the use of actual cash flows.

Non-Cash Flow Items

The cash flow statement ignores events that have no cash flow impacts. Accountants exclude expenses such as depreciation in the cash flow statement but recognizes them in arriving at profits to show the approximate usage of fixed assets. Accountants also add the gain on the disposal of fixed assets to the profits amount, but for the cash flow statement, they take the whole cash proceeds from such a sale.

Accrued Expenses

Expenses due at the end of a financial period are not included in the cash flow statement because no actual outflow of cash has occurred. However, the income statement is prepared on the accrual basis of accounting and thus recognizes expenses in the period they are incurred, regardless of whether they have been paid or not.

Prepaid Expenses

Payments made by the company for a subsequent period amount to a cash outflow and, therefore, are included in the cash flow statement in the period of outflow. The income statement does not include prepayments because the expense belongs to a different financial period in accordance with the matching principle of accrual accounting.

Capital Items

Cash flow statements highlight events such as outlays on a new plant or even the issuance of new shares that have a delayed and multi-period effect on a firm’s operations. On the other hand, the income statement considers only revenue expenditures items for profit assessments. A firm can thus show a high profit figure and at the same time have liquidity problems.

References

• “Corporate Financial Accounting and Reporting”;Sutton T; 2004
• “Principles of Corporate Financial Accounting”;Reeve J.M; 2009