Question

Using relevant accounting concepts and standards discuss why Cash is a fact but Profit is an option.

Answer 1

The financial community is obsessed by profit and profit growth. Company profits and stock prices clearly are positively correlated. Yet, every profit figure is the result of convention and interpretation. Although financial statements are expected to mirror the operational and financial condition of company, looks can be deceiving. All too often analysts, investors and even management teams treat cash flow in a step motherly way. Yet, cash flow is a company’s fuel. For a company to thrive, cash flow needs to be managed carefully. For investors too, cash flow is of the utmost importance as it is cash flow, not profit, which allows companies to grow and it is cash flow, not profit, which allows for dividend payments and share buybacks.