Answer to Question #98278 in Finance for Dod

Question

You
the owner of a small business thinks that something is wrong with their accounting system because the following information has been reported form September 2018.

Net Profit after tax $5400
net cash from operations $2300

can you help the owners understand why this might occur?
your explanation should be refer to relevant accounting principles

Answer 1

Net income is the profit a company has earned for a period, while cash flow from operating activities measures, in part, the cash going in and out during a company's day-to-day operations.

It would seem that the company's profit, which is reflected in the income statement, should be an indicator of its effectiveness. But the profit is not necessarily related to the money the company receives. Yes, in the end, the company must make a profit in monetary terms. However, as many were convinced that profits could not pay bills, even profitable companies have problems with paying debts.

net cash from operations = Net Profit after tax + increase in accounts payable - increase in receivables

thus, cash from operations is more than net profit in the event that in the reporting period the company reduced its accounts payable (paid off debts) and increased its receivables (sold on credit)

it matches the revenue recognition principle

https://www.investopedia.com/ask/answers/042115/what-difference-between-net-income-and-cash-flow-operating-activities.asp

https://www.investopedia.com/terms/a/accounting-principles.asp

https://www.accountingtools.com/articles/2017/5/15/the-revenue-recognition-principle