Why is cash generated from operations usually larger than net profit? A business commentator made the following remark during a discussion of the financial performance of a large, but struggling, company: These accountants spend lots of money to create complicated financial statements, especially income statements, which use what they call ‘accrual’ accounting. Then they take away all the accruals and supposedly return us to the cash profit number (‘cash flow from operations’) we would have had anyway, if they hadn’t bothered with accrual accounting in the first place! Why don’t they just give us the cash profit and leave it at that? If you were an accountant involved in the discussion, and everyone turned to you to hear your response to the commentator, what would you say?
Why is cash generated from operations usually larger than net profit?
A business commentator made the following remark during a discussion of the financial performance of a large, but struggling, company:
These accountants spend lots of money to create complicated financial statements, especially income statements, which use what they call ‘accrual’ accounting. Then they take away all the accruals and supposedly return us to the cash profit number (‘cash flow from operations’) we would have had anyway, if they hadn’t bothered with accrual accounting in the first place! Why don’t they just give us the cash profit and leave it at that? If you were an accountant involved in the discussion, and everyone turned to you to hear your response to the commentator, what would you say?
Step by step
Solved in 3 steps
