Is it possible for a company to have positive cash flow but be in serious financial trouble? - letsdiskuss
Official Letsdiskuss Logo
Official Letsdiskuss Logo

Language



Blog
Earn With Us

Rohit Valiyan

Cashier ( Kotak Mahindra Bank ) | Posted on | Share-Market-Finance


Is it possible for a company to have positive cash flow but be in serious financial trouble?


0
0




| Posted on


There are two concept into accounting. One is cash flow accounting and the other is financial accounting. Cash flow accounting only takes into consideration the cash flows of a concern ie Cash inflows into the business and cash outflows from the business. Whereas financial accounting is a broad concept and takes into consideration all the aspects of income, and the sources of earning and also all the avenues of the cost.

The cash flow accounting is based on cash concept ie the transactions in which cash is involved is considered. Thus only those transactions are considered in which either cash is earned or cash is spent. The amount to be received in the future and the amount to be incurred is not taken into account.

Letsdiskuss

However under financial accounting, accrual concept is followed. Under this system, all the transactions are recorded into the books of accounts which involve cash and which does not involve cash. Therefore apart from cash transactions other transactions which are of accrual nature are to be considered like income received in advance, liability paid in advance, income to be received in future, liability to be paid in future all are recorded.
Also in cash flow the non cash transactions such as depreciation, provisions for depreciation, bad debts etc are not considered which are considered in financial accounting.

So coming to your question, an organisation may have a positive cash flow ie it's inflows are greater than the outflows at a point of time whereas the organisation is in serious financial trouble like facing huge losses, falling net profit, etc. This scenario is completely possible that the company may have liquidity but doesnot has profitability.Smiley face

Thus, a company may enjoy enough cash into into its bank, but may suffer from huge financial trouble. It is because the cash flow only deal with cash transactions and that too only present transactions. Whereas financial accounting deals with both cash as well as non cash transactions, accrual as well as historic transactions which may hamper the profitability.


0
0