You own a business and have offered a line of credit to someone who really wants to buy your Star Wars-themed phone cases. On your balance sheet, that transaction is listed under accounts receivable, or the tab you're keeping open for customers you hope pay up soon.
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Finance: What is cash flow v earnings?17 Views
Finance allah shmoop what is cash flow versus earnings Okay
you think profits or profits right Well not unless you
spell it P r o p h e t s
Ask a gandhi or jeff bezos about that All right
Well in the land of accounting there are aptly named
accounting profits and there are also cash profits and the
two of them are often very different Accounting laws skew
things when it comes to assessing riel cash profits Here's
out the ceo and founder of give a dog a
drone A company that specializes in engineering remote control toys
for your pets built a drone stamping factory for one
hundred million dollars knowing that it will be worth twenty
million dollars in scrap value in just four years Well
he'll sell at that point and possibly upgrade if demand
for puppy and kitty tech is still high will drone
sales or steady producing cash profits of fifty million bucks
a year each year into the foreseeable future but stated
earnings and cash flows here are very different In the
first year when the factory was built the company lost
big cash money because it had to write one hundred
Million dollar check to the builder of the factory Yes
it made fifty million in profits but that year it
lost fifty million dollars in cash Luckily it had no
debt and it had one hundred twenty five million dollars
in the bank Well that bank account went down to
just twenty five million when they wrote one hundred million
dollar check But it gradually filled back up to seventy
five million by the time that year was done fifty
million of profits and that fifty million in cash Yeah
that that helps that floated right back in there Okay
so the cash that year was volatile It was a
hundred twenty five million to start But then i went
down to twenty five million after the factory purchase than
end up a year later with fifty million added to
their coffers and gas profits from operation leaving them with
seventy five million bucks in the bank got all that
All right So here's where the difference hits between accounting
profits perspective and a cash flow perspective on the notion
of profit Simply put it isn't fair for the company
Tohave a view that the one hundred million dollars factory
as an expense should all hit the profits line all
in one year as if they bore the burden of
all that factory cost in one year and then showing
it is being worthless in years Two three four and
maybe beyond In fact the company doing proper accounting depreciates
that factory in value to the tune of twenty million
dollars a year for for four years until it will
then sell it for scrap for twenty million bucks So
that hit to the company in the first year should
be twenty million dollars in value not one hundred million
in cash That's an accounting change of assessing twenty million
in expenses not one hundred million how's that work well
the decline in value of that hundred million dollars takes
five years And it looks like this But in your
won the company loses one hundred million dollars in cash
but gains a factory Confused Good Okay well let's zoom
forward to your floor The company again made fifty million
dollars in cash profits but it will show earnings of
only thirty million Why Well because proper accounting using straight
lined appreciation of that hundred million dollar factory properly shows
the company depreciating it's value another twenty million dollars against
its cash profitability So what A thirty percent tax rate
company pays taxes on thirty million of profits or a
tax bill of nine million bucks It's accounting earnings are
actually twenty one million dollars but it will have produced
cash or cash flow of fifty million dollars minus the
nine million in taxes or forty one million in cash
profits I either Cash flow is almost double the reported
accounting profits Now with all that profit our company can
finally start mass producing kitty copters Yeah yeah we're naming 00:03:55.308 --> [endTime] this cat todd
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