Question

6 The statement of cash flows is an important part of every financial report. Required: A) Provide a detailed discussion of the differences between the statement of cash flows and the statement of comprehensive income. B) Explain three reasons why an entity may show a profit in its statement of comprehensive income AND at the same time display a negative overall cash flow during the same period.

Answer 1

A.

BASIS OF DIFFERECE	INCOME STATEMENT	CASH FLOW STATEMENT
MEANING	Income statement refers to the statement that reflects the total revenue and total expenditure made by the company during a given accounting period.	On the other hand, Cash Flow Statement refers to the statement that shows total inflow and total outflow of cash made by the company during a given accounting period.
Nature of Recorded Items	Income statement records non accounting items also, like depreciation.	Cash flow statement deals only with the items that are directly related with the inflow/receipt or outflow/payment of cash.
Types of Activities	The items recorded, under this statement are categorised into two parts: a) Operating Activities b) Non-operating activities	The items which are recorded under this statement are categorised into three main activities : a) Operating activities b) Investing activities c) Financing Activities

B.

There could be various reasons for the difference between the balance of Income statement and that shown by the cash flow statement. Because, while preparing the income statement the transactions are recorded on the basis of accrual accounting and on the other side, under the Cash flow statement the transactions are recorded on the basis of actual inflow or outflow of cash.

Reasons of having a positive balance in the Income Statement and at the same time, a negative balance in cash flow Statement are as follows:

1) INCREASING ACCOUNT RECEIVABLES:

Account receivables represent those category of company’s customers to whom the sale is made on credit basis and the payment for the goods sold has not been received yet. This will lead to increase in the revenue of income as the sales are made by the company but will have no impact on the cash flow statement as the cash has not been received.

2) INCREASING LIABLITIES (or Accrued expenses):

Accrued expenses refer to the expenses for which the company has not made the payment in cash at the time these expenditures were incurred and that’s the reason they have not affected the cash flow statement in the year they have been incurred but will affect the cash balance in a negative way in the year, the payment will be made by the company in cash.

3) INCEASING LOAN REPAYMENTS:

A big amount as a loan repayment will impact the cash flow statement significantly but if we look at the impact of this payment on the Income statement than that would be comparatively less because only the interest component of the loan repayment will be deducted as an expense from the company’s revenue to determine net profits.