Chapter 8: Preparing a Cash Flow Statement

A wise man once said Turnover is vanity, profit is sanity, but cash is reality. An entity's profit and loss (P&L) account gives the result (profit or loss) of revenue activities during the year, and the balance sheet gives a snapshot of the assets, liabilities, and equity at the balance sheet date. However, both of these statements are affected by the accruals basis of accounting that seeks to ensure that all transactions that belong to the period under review are brought into the accounts for that period, irrespective of whether or not cash has changed hands. This means that you are likely to have turnover or sales or income that is not supported by cash inflow because some sales would have been made on credit and may would not yet have been paid for by the period end. This also affects purchases, inventory, and expenses that are either prepaid (such as rent and insurance) or accrued (such as electricity). Since the ability to settle...