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Guide Accounting For Dummies_4

Tham khảo tài liệu 'guide accounting for dummies_4', tài chính - ngân hàng, kế toán - kiểm toán phục vụ nhu cầu học tập, nghiên cứu và làm việc hiệu quả | 120 Part II Figuring Out Financial Statements know that its cash decreases when a business pays down its debt returns some of the capital that its owners had previously invested in the business and invests in new fixed assets buildings machines equipment vehicles and so on . .cjABE Most people also know there is another important source of cash making profit. However things get a little tricky regarding this source of cash. One problem is this Instead of saying that a business earns profit people say that a business makes money. Therefore many people assume that the bottom-line profit for the year increases cash exactly the same amount no more and no less. Not true The actual amount of cash flow from making profit is invariably different than the amount of profit earned for the period. Earning profit and generating cash flow from the profit are two different things. You re talking about apples and oranges when you re talking about profit and cash flow from profit. Here s a very brief explanation of why profit and cash flow from profit are different amounts. When a business makes sales on credit sales revenue is recorded before cash is collected from customers. Cash inflow from credit sales takes place after recording the sales revenue. Also many expenses are recorded before cash is paid for the liabilities incurred by the expenses. So cash outflow for the expenses takes place after recording the expenses. Furthermore the recording of depreciation expense does not require a cash outlay in the period. You could simply add back depreciation expense to bottom-line profit to get a rough and I mean rough measure of cash flow from making profit. But this shortcut ignores the other factors that affect cash flow from profit and I don t recommend it. Note Because I use the same business example in this chapter that I use in Chapters 4 and 5 you may want to take a moment to review its 2009 income statement in Figure 4-1. And you may want to review Figure 5-1 which summarizes