Cash Flows in Business Organisations - Coursework Example

The concept of Net Profit and Net Cash Flow are not the same which often becomes a cause of concern for business owners. The difference in net income and cash flow arises because of the way income statements are prepared. Under the ‘accrual’ method of accounting, net income is calculated subtracting incurred expenses from earned revenues. Further, net revenues include credit sales (not involving immediate cash flows) and expenses include various provisions, deferred payments, depreciation, etc.

that does not involve actual movement of cash during current period. In the statement of cash flow, all such accrual concepts are adjusted to net profit and only then operating cash flow is correctly arrived. For instance, consider the financial statements of UAL (shown in Appendix) where the company has incurred net loss of $723 million for the year ending 2012 but from the consolidated statement of cash flows we find that its Net Cash from Operations for the same fiscal was $935 million. This is because the company has charged higher ‘Depreciation & Amortisation’ for capital expenditure that does not involve actual outflow of cash.

Thus, the books of account of company may show high/low net profits despite of having much less/high cash on hand. As per the requirements of IAS 7, operating activities involved in a business has to be reported using indirect or direct method. In the former method, profit/loss has to be adjusted after considering the effects of non-cash transactions like deprecation, accruals or deferrals of future or past operating activities. The later method classifies different operating items into gross cash payments and gross cash receipts.

Information required for calculating these items are derived from books of account (adjusted sales, cost of sales, etc.). The basic layout of each method is depicted below, The ‘Net Cash from Operations’ in US Airways in 2011 was $472 million