CASH VERSUS PROFIT
How to tell the difference
MAKE SURE YOU HAVE A COPY OF THE PROFIT
& LOSS STATEMENT & CASH FLOW STATEMENT
FOR MURPHY’S CAR PARTS
Cash Flow Statement
Profit & Loss Statement
Operating
Inflows
Cash Sales
Revenue: Cash Sale
42000
Receipts from Debtors
5230
GST Collected
4200
Credit Sales 10000 52000
Less Cost of Goods Sold
51430
Cost of Sales 10830
Outflows
Cartage In
GST Paid
(5390)
GST Settlement
(2400)
Insurance
Rent
Cartage In
Wages
42000
250 11080
Gross Profit
Add
40920
Stock Gain
150
(1400)
Adjusted Gross Profit
41070
(12000)
Less Other Expenses
(250)
(18200)
Insurance
1400
Advertising
4600
Prepaid Advertising
(7600)
Wages
19000
Stock
(4000)
Rent
12000
Payments to Creditors (10500)
(61740)
Net Cash Outflow
(10310)
Depreciation
Net Profit
2480 39480
1590
STEP 1: CAREFULLY READ THE QUESTION

Read the question to determine what is being
asked and pay attention to any constraints e.g.
even though, but, however.


Jane Murphy’s accountant prepared her business
reports. The Profit & Loss statement states there is
a profit of $1,590 even though the Cash Flow
Statement lists Net Cash Outflows from Operating
Activities as ($13,310). Explain how this could have
happened.
Notice that the question does not talk about
Investing or Financing Activities so you would
not refer to Capital, Drawings, Loans or Loan
repayments.
STEP 2 WORK OUT WHICH ITEMS AFFECT ONLY THE
PROFIT & LOSS STATEMENT OR THE STATEMENT OF
RECEIPTS & PAYMENTS OR AFFECT BOTH BUT IN
DIFFERENT WAYS?

A business makes a Net Profit


Revenue items that only contribute to profit and do
not affect cash e.g. Stock Gain will contribute to
profit but has no effect on cash.
A business makes a Net Loss
 Expense
items that contribute to the loss but have no affect on
cash e.g. Stock loss will contribute to the loss but will not affect
cash.

Cash Sales affects both profit & cash but is not
suitable to be used as part of the answer because
it affect both by exactly the same amount.
Cash Flow Statement
Profit & Loss Statement
Operating
Inflows
Cash Sales
Revenue: Cash Sale
42000
Receipts from Debtors
5230
GST Collected
4200
Credit Sales 10000 52000
Less Cost of Goods Sold
51430
Cost of Sales 10830
Outflows
Cartage In
GST Paid
(5390)
GST Settlement
(2400)
Insurance
Rent
Cartage In
Wages
42000
250 11080
Gross Profit
Add
40920
Stock Gain
150
(1400)
Adjusted Gross Profit
41070
(12000)
Less Other Expenses
(250)
(18200)
Insurance
1400
Advertising
4600
Prepaid Advertising
(7600)
Wages
19000
Stock
(4000)
Rent
12000
Payments to Creditors (10500)
(61740)
Net Cash Outflow
(10310)
Depreciation
Net Profit
2480 39480
1590
STEP 3 LOOK FOR THE APPROPRIATE ITEMS IN
THE STATEMENT OF RECEIPTS & PAYMENTS OR
PROFIT & LOSS STATEMENT IN THE SCENARIO

Identify receipts that will contribute to the bank
balance that will not increase profit.
Receipts from Debtors
 GST Collected


Identify payments that will contribute to the
bank balance that will not decrease profit.






GST Settlement
GST Payments
Wages
Prepaid Adverting
Stock
Payments to Creditor
Cash Flow Statement
Profit & Loss Statement
Operating
Inflows
Cash Sales
Revenue: Cash Sale
42000
Receipts from Debtors
5230
GST Collected
4200
Credit Sales 10000 52000
Less Cost of Goods Sold
51430
Cost of Sales 10830
Outflows
Cartage In
GST Paid
(5390)
GST Settlement
(2400)
Insurance
Rent
Cartage In
Wages
42000
250 11080
Gross Profit
Add
40920
Stock Gain
150
(1400)
Adjusted Gross Profit
41070
(12000)
Less Other Expenses
(250)
(18200)
Insurance
1400
Advertising
4600
Prepaid Advertising
(7600)
Wages
19000
Stock
(4000)
Rent
12000
Payments to Creditors (10500)
(61740)
Net Cash Outflow
(10310)
Depreciation
Net Profit
2480 39480
1590
STEP 3 LOOK FOR THE APPROPRIATE ITEMS IN
THE STATEMENT OF RECEIPTS & PAYMENTS OR
PROFIT & LOSS STATEMENT

Identify revenue items that will contribute to
profit that will not increase the bank balance.
Credit Sales
 Stock Gain


Identify expense items that will contribute to
profit that will not increase the bank balance.
Cost of Sales
 Wages
 Insurance
 Depreciation

Cash Flow Statement
Profit & Loss Statement
Operating
Inflows
Cash Sales
Revenue: Cash Sale
42000
Receipts from Debtors
5230
GST Collected
4200
Credit Sales 10000 52000
Less Cost of Goods Sold
51430
Cost of Sales 10830
Outflows
Cartage In
GST Paid
(5390)
GST Settlement
(2400)
Insurance
Rent
Cartage In
Wages
42000
250 11080
Gross Profit
Add
40920
Stock Gain
150
(1400)
Adjusted Gross Profit
41070
(12000)
Less Other Expenses
(250)
(18200)
Insurance
1400
Advertising
4600
Prepaid Advertising
(7600)
Wages
19000
Stock
(4000)
Rent
12000
Payments to Creditors (10500)
(61740)
Net Cash Outflow
(10310)
Depreciation
Net Profit
2480 39480
1590
STEP 4: ITEMS ALREADY IDENTIFIED THAT
AFFECT PROFIT AND CASH BUT IN DIFFERENT
AMOUNTS.
Credit Sales versus Receipts from Debtors
 Cost of Sales versus Payments to Creditors & Stock
 Prepaid Advertising versus Advertising Expense
 Accrued Wages versus Wages Expense

Cash Flow Statement
Profit & Loss Statement
Operating
Inflows
Cash Sales
Revenue: Cash Sale
42000
Receipts from Debtors
5230
GST Collected
4200
Credit Sales 10000 52000
Less Cost of Goods Sold
51430
Cost of Sales 10830
Outflows
Cartage In
GST Paid
(5390)
GST Settlement
(2400)
Insurance
Rent
Cartage In
Wages
42000
250 11080
Gross Profit
Add
40920
Stock Gain
150
(1400)
Adjusted Gross Profit
41070
(12000)
Less Other Expenses
(250)
(18200)
Insurance
1400
Advertising
4600
Prepaid Advertising
(7600)
Wages
19000
Stock
(4000)
Rent
12000
Payments to Creditors (10500)
(61740)
Net Cash Outflow
(10310)
Depreciation
Net Profit
2480 39480
1590
WRITING THE ANSWER
GST Settlement increases Operating Outflows and
contributes to Net Cash Outflows but has no
effect on Net Profit.
GST Paid is greater than GST Collected and so
contributes to Net Cash Outflows but not to Net
Profit.
Stock Gain increases Revenue but has no effect on
cash.
Credit Sales is greater than Receipts from Debtors
and has a greater effect on profit than cash.
Payments to Creditors and purchases of Stock are
greater than Cost of Sales and have a greater
effect on cash than profit.