Question

Describe 3 transactions that would affect the profit made by a company but not the cashflow (clearly explaining why cashflow would not be affected)

Answer 1

Transaction 1: When a company sells products or services, the transaction can impact profit and cash flow differently. Companies record net income as soon as transactions occur, so if a manufacturer sells $5,000 worth of goods to retailer, it records $5,000 of revenue. However, Cash flow does not change until a company actually receives cash for the sales it makes. If the retailer doesn't pay the manufacturer $5,000 immediately, it might have $5,000 less cash on hand than it has in net income. If the retailer ends up returning products, the amount of cash it ultimately receives from the transaction could be less than $5,000

Transaction 2: Cash flows reflect the cash that actually has been paid in particular year. However capital expenditure does not count against profit directly. A capital expenditure doesn’t appear on the income statement when it occurs. It is only the depreciation that is charges against revenue over time which is based on the useful life of the item that was purchased. For example a fixed asset has been purchased for $1, 00,000 in year 1 and cash flow has been affected by same amount in same year. However the depreciation in the upcoming years will affect the profit but not the cash flow.

Transaction 3: Another transaction would be if a company issued $1 million in stock to acquire another company for $1 million, this non-cash transaction saves the company’s cash flow expense of raising capital. Instead of needing to raise $1.1 million to pay $100,000 to the investment bankers who helped raise the funds, company is able to save $100,000 in financing expenses and reduce the dilution of its equity.