Accounting (CASH FLOWS IN BUSINESS ORGANISATIONS) - Coursework Example

Comparatively, net cash flow is defined as the difference between the amount of cash that come in and go out of a company within a period. To begin with, to understand the underlying factor causing the difference in these two major accounting items, it is important to recapture the fact that the estimation of a company’s net profit is guided by some rules provided by the GAAP. Unlike net profit, cash flow determination is not affected by any rules established by GAAP (Robbins 2014, par. 1-11).

Second, it is important to note that net profit is determined by subtracting the operating expenses incurred in the process of producing goods from revenues generated by the sales proceeds of those goods and services. On the other hand, cash inflows or outflows of a business are not generated from the sales of goods and services. Instead, cash inflows come from sources such as loans and gifts whereas cash outflows arise due to activities such loan repayment. Therefore, a company can make losses but have a positive net cash flow, balance due to a substantial amount of borrowed money.

Below is a hypothetical illustration of the difference. With reference to the provisions of the international accounting standards 7 (IAS 7), the indirect method of cash flow preparation involves commencement with the net income, which is adjusted for other transactions in order to obtain the net cash flow. Whereas, the direct method simply outlines cash inflows and outflows that form part of the operating activities of a company. In the latter, the difference between the negative figures (outflows) and the positive figures (inflows) gives the net cash flow.

Illustrations are provided under appendix A and B (Gowthorpe 2005, pp. 212). Operating activities: appendix 2 and 3 contains a copy of the two companies cash flow statement. In the year 2011 and 2012, the following transpired as shown in the cash flow