Difference between Cash Flow and Net Profit

This article explains the difference between cash flow and net profit in a business organization. It discusses the reasons for the disparity between the two and the impact on financial statements. The article also highlights the disclosure requirements in relation to AASB 107 for preparing a statement of cash flow.

Question 5- Difference between cash flow and net profit
Total profit generated by the business organization is it different from total cash flow
generated by Wesfarmers Limited in 2018. Generated by the organization is $1197 million
whereas net cash outflow was $330 million (Wesfarmers Limited, 2018). On the basis of this
analysis can be said that there is a cash outflow irrespective of the fact that management has
earned a profit of more than $1000 million.
It is very common for a business organization to have a difference in the amount of profit and
amount of net cash to during an accounting period due to various reasons. Following are
some of the reasons that have resulted in the difference-
Cash flow from financing and investing activities- management of the organization is only
required to record financial transactions in PL account that are affecting the profitability of
the organization in a particular financial year. The main objective of PL account is to identify
proper generated from the main business operations of the company than capital and
financing activities. This is the reason that management of the company does not include
activities like an investment in machinery or raising a loan in PL account whereas these
activities are disclosed in statement of cash flow (Robinson, Henry, Pirie & Broihahn, 2015).
These activities are required to be disclosed in the cash flow statement as this will definitely
impact the cash inflow and outflow in a particular accounting period.
Account receivables and account payables- It can be identified that to the balance sheet for
the year ending 2018 have an outstanding amount in relation to accounting receivables and
account payables. These outstanding amounts shows that management has not been able to
collect entire revenue generated by the organization in the financial year from customers. On
the other hand, management has not paid the entire amount due to the supplier in 2018.
Therefore these account receivables and account payables will not be shown in statement of
cash as cash is not received and paid (Robinson, Henry, Pirie & Broihahn, 2015). On the
other hand, this will be recorded in PL account due to the accrual system of accounting.

Question 6- Disclosure requirements in relation to AASB 107
According to the rules and regulations issued by the Australian accounting standard board,
every business organization is required to prepare a statement of cash flow at the end of every
financial year. According to these regulations management of the organization is required to
follow the direct or indirect method while preparing this component of financial statement.
According to this accounting standard, all the financial transactions that are affecting
business organizations cash funds in a particular accounting period should be disclosed
(Standard, 2015). In addition to that cash accounting method should be used for preparing
cash flow statement rather than an accrual accounting system.
This accounting standard also requires business organizations to categorize all the cash flow
activities into three major categories while preparing cash flow statement i.e. operating
financing and investing activities. This type of disclosure will help investors to understand
the cash position of the organization in an effective manner. For example, cash inflow from
operating activities is considered as profitable for the organization whereas cash inflow from
investing activities is not considered as optimum. This is due to the fact that cash inflow from
investing activity means that management is selling its plant and machinery which can be an
indication for a shortage of cash in the business (Jones, 2016).
All the principles mentioned in AASB 107 followed by management of Wesfarmers limited
while preparing a cash flow statement.

References
Jones, S., 2016. A cash flow based model of corporate bankruptcy in Australia. Journal of
Applied Management Accounting Research, 14(1), p.23.
Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial
statement analysis. John Wiley & Sons.
Standard, I.A., 2015. Presentation of Financial Statements. Balance Sheet, 54, p.80A.
Wesfarmers Limited. 2018. Annual Report 2018. Retrievable at:
https://www.wesfarmers.com.au/docs/default-source/asx-announcements/2018-
annual-report.pdf?sfvrsn=0