C ASH VERSUS P ROFIT How to tell the difference
M AKE SURE YOU HAVE A COPY OF THE P ROFIT & L OSS S TATEMENT & C ASH F LOW S TATEMENT FOR M URPHY ’ S C AR P ARTS Revenue: Cash Sale Credit Sales Less Cost of Goods Sold Cost of Sales Cartage In Gross Profit40920 AddStock Gain 150 Adjusted Gross Profit41070 Less Other Expenses Insurance 1400 Advertising 4600 Wages Rent Depreciation Net Profit 1590 Operating Inflows Cash Sales Receipts from Debtors 5230 GST Collected Outflows GST Paid (5390) GST Settlement (2400) Insurance (1400) Rent (12000) Cartage In (250) Wages (18200) Prepaid Advertising (7600) Stock (4000) Payments to Creditors (10500)(61740) Net Cash Outflow(10310) Cash Flow StatementProfit & Loss Statement
S TEP 1 : C AREFULLY READ THE QUESTION Read the question to determine what is being asked and pay attention to any constraints e.g. even though, but, however. Jane Murphy’s accountant prepared her business reports. The Profit & Loss statement states there is a profit of $1,590 even though the Cash Flow Statement lists Net Cash Outflows from Operating Activities as ($13,310). Explain how this could have happened. Notice that the question does not talk about Investing or Financing Activities so you would not refer to Capital, Drawings, Loans or Loan repayments.
S TEP 2 W ORK OUT WHICH ITEMS AFFECT ONLY THE P ROFIT & L OSS S TATEMENT OR THE S TATEMENT OF R ECEIPTS & P AYMENTS OR AFFECT BOTH BUT IN DIFFERENT WAYS ? A business makes a Net Profit Revenue items that only contribute to profit and do not affect cash e.g. Stock Gain will contribute to profit but has no effect on cash. A business makes a Net Loss Expense items that contribute to the loss but have no affect on cash e.g. Stock loss will contribute to the loss but will not affect cash. Cash Sales affects both profit & cash but is not suitable to be used as part of the answer because it affect both by exactly the same amount.
Revenue: Cash Sale Credit Sales Less Cost of Goods Sold Cost of Sales Cartage In Gross Profit40920 AddStock Gain 150 Adjusted Gross Profit41070 Less Other Expenses Insurance 1400 Advertising 4600 Wages Rent Depreciation Net Profit 1590 Operating Inflows Cash Sales Receipts from Debtors 5230 GST Collected Outflows GST Paid (5390) GST Settlement (2400) Insurance (1400) Rent (12000) Cartage In (250) Wages (18200) Prepaid Advertising (7600) Stock (4000) Payments to Creditors (10500)(61740) Net Cash Outflow(10310) Cash Flow StatementProfit & Loss Statement
S TEP 3 L OOK FOR THE APPROPRIATE ITEMS IN THE S TATEMENT OF R ECEIPTS & P AYMENTS OR P ROFIT & L OSS S TATEMENT IN THE SCENARIO Identify receipts that will contribute to the bank balance that will not increase profit. Receipts from Debtors GST Collected Identify payments that will contribute to the bank balance that will not decrease profit. GST Settlement GST Payments Wages Prepaid Adverting Stock Payments to Creditor
Revenue: Cash Sale Credit Sales Less Cost of Goods Sold Cost of Sales Cartage In Gross Profit40920 AddStock Gain 150 Adjusted Gross Profit41070 Less Other Expenses Insurance 1400 Advertising 4600 Wages Rent Depreciation Net Profit 1590 Operating Inflows Cash Sales Receipts from Debtors 5230 GST Collected Outflows GST Paid (5390) GST Settlement (2400) Insurance (1400) Rent (12000) Cartage In (250) Wages (18200) Prepaid Advertising (7600) Stock (4000) Payments to Creditors (10500)(61740) Net Cash Outflow(10310) Cash Flow StatementProfit & Loss Statement
S TEP 3 L OOK FOR THE APPROPRIATE ITEMS IN THE S TATEMENT OF R ECEIPTS & P AYMENTS OR P ROFIT & L OSS S TATEMENT Identify revenue items that will contribute to profit that will not increase the bank balance. Credit Sales Stock Gain Identify expense items that will contribute to profit that will not increase the bank balance. Cost of Sales Wages Insurance Depreciation
Revenue: Cash Sale Credit Sales Less Cost of Goods Sold Cost of Sales Cartage In Gross Profit40920 AddStock Gain 150 Adjusted Gross Profit41070 Less Other Expenses Insurance 1400 Advertising 4600 Wages Rent Depreciation Net Profit 1590 Operating Inflows Cash Sales Receipts from Debtors 5230 GST Collected Outflows GST Paid (5390) GST Settlement (2400) Insurance (1400) Rent (12000) Cartage In (250) Wages (18200) Prepaid Advertising (7600) Stock (4000) Payments to Creditors (10500)(61740) Net Cash Outflow(10310) Cash Flow StatementProfit & Loss Statement
S TEP 4: I TEMS ALREADY IDENTIFIED THAT AFFECT P ROFIT AND C ASH BUT IN DIFFERENT AMOUNTS. Credit Sales versus Receipts from Debtors Cost of Sales versus Payments to Creditors & Stock Prepaid Advertising versus Advertising Expense Accrued Wages versus Wages Expense
Revenue: Cash Sale Credit Sales Less Cost of Goods Sold Cost of Sales Cartage In Gross Profit40920 AddStock Gain 150 Adjusted Gross Profit41070 Less Other Expenses Insurance 1400 Advertising 4600 Wages Rent Depreciation Net Profit 1590 Operating Inflows Cash Sales Receipts from Debtors 5230 GST Collected Outflows GST Paid (5390) GST Settlement (2400) Insurance (1400) Rent (12000) Cartage In (250) Wages (18200) Prepaid Advertising (7600) Stock (4000) Payments to Creditors (10500)(61740) Net Cash Outflow(10310) Cash Flow StatementProfit & Loss Statement
W RITING THE ANSWER GST Settlement increases Operating Outflows and contributes to Net Cash Outflows but has no effect on Net Profit. GST Paid is greater than GST Collected and so contributes to Net Cash Outflows but not to Net Profit. Stock Gain increases Revenue but has no effect on cash. Credit Sales is greater than Receipts from Debtors and has a greater effect on profit than cash. Payments to Creditors and purchases of Stock are greater than Cost of Sales and have a greater effect on cash than profit.