Question

1. Describe a situation where a business might be earning a profit but have a negative cash flow from operations.
2. Describe a situation where a business might have a positive cash flow from operations but not earning a profit.

Answer 1

A. Business may be earning a profit when it is having a very high amount of sales from the overall business and there will be a lower cost of operations but when the business has incurred a large amount of capital expenditure and it has right to to buy out fixed assets then the overall cash expenditure will be increasing and the cash flow will be decreasing and income will not be having any impact.

B. When the businesses have incurred huge losses because the company has not been able to generate excess of the revenues and cost is higher than the overall revenue.

In these scenarios , the income will be lower but the business had sold its fixed assets and it has gained the cash flows so the selling of the fixed asset will not completely be recorded into the income statement and only the gain or loss will be recorded but the overall cash flows which is cash inflow will be recorded in the cash flow statement and it would be leading to positive cash flow.