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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

6.1. Seeing the Big Picture of Cash Flows

People generally understand that a business increases its cash by increasing its debt and by its owners investing more money in the business. They understand that a business can also sell some of its assets to provide cash. They know that its cash decreases when a business pays down its debt, returns some of the capital that its owners had previously invested in the business, and invests in new fixed assets (buildings, machines, equipment, vehicles, and so on).

NOTE

Most people also know there is another important source of cash: making profit. However, things get a little tricky regarding this source of cash. One problem is this: Instead of saying that a business "earns profit," people say that a business "makes money." Therefore, many people assume that the bottom-line profit for the year increases cash exactly the same amount — no more, and no less. Not true: The actual amount of cash flow from making profit is invariably different than the amount of profit earned for the period. Earning profit and generating cash flow from the profit are two different things. You're talking about apples and oranges when you're talking about profit and cash flow from profit.

Here's a very brief explanation of why profit and cash flow from profit are different amounts. When a business makes sales on credit, sales revenue is recorded before cash is collected ...

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Publisher Resources

ISBN: 9780470246009Purchase book