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Accounting For Dummies®, 4th Edition
book

Accounting For Dummies®, 4th Edition

by John A. Tracy CPA
June 2008
Beginner content levelBeginner
402 pages
11h 4m
English
For Dummies
Content preview from Accounting For Dummies®, 4th Edition

6.3. Dissecting the Difference Between Cash Flow and Net Income

A positive cash flow from operating activities is the amount of cash generated by a business's profit-making operations during the year, exclusive of its other sources of cash during the year. Cash flow from operating activities indicates a business's ability to turn profit into available cash — cash in the bank that can be used for the needs of business. As you see in Figure 6-1 or Figure 6-2 (take your pick), the business in our example generated $1,515,000 cash from its profit-making activities in the year. As they say in New York, "That isn't chopped liver."

The business in our example experienced a strong growth year. Its accounts receivable and inventory increased by relatively large amounts. In fact, all its assets and liabilities intimately connected with sales and expenses increased; their ending balances are larger than their beginning balances (which are the amounts carried forward from the end of the preceding year). Of course, this may not always be the case in a growth situation; one or more assets and liabilities could decrease during the year. For flat, no-growth situations, it's likely that there will be a mix of modest-sized increases and decreases.

The following sections explain how the asset and liability changes affect cash flow from operating activities. As a business manager, you should keep ...

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ISBN: 9780470246009Purchase book