Financial statements
Profit and loss vs. cash flow vs. balance sheet
Imagine a business that had generated 100 in extra revenue and profits, but that 25% of customers were yet to pay.
The impact on the profit and loss statement
The profit and loss statement would show the 100 increase in profits. That’s the accountants’ view of underlying business performance.
The impact on the cash flow statement
The cash flow statement would show the 100 increase in profits, less the 25 yet to be paid = 75. At the bottom of the cash flow statement cash flows would have increased by 75.
The impact on the balance sheet
The balance sheet is the difference between what we own/ are owed (= assets) and what we owe (= liabilities. If cash flow is less than profits, then what we are owed has increased. In the example above:
- 25 we are owed = 100 profits less 75 increase in cash
Assets on the balance sheet are going to increase by the 25 we are owed from customers (= debtors or receivables). Cash on the balance sheet will also increase by 75.
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