There are many explanations for how a company produces a loss while maintaining a positive cash flow.
The first step is to understand the difference between net income and cash flow. Net income is calculated by subtracting business costs, including expenses, taxes, depreciation, and interest. If net income is positive, the company has a higher chance of paying debts, dividends, and operating expenses.
On the other hand, cash flow is the net amount of cash and cash equivalents being transacted within a company in a given period. Cash flow is reported on the statement of cash flows, demonstrating how money is being received and spent. When a company reports a positive cash flow, this means the company’s liquid assets are increasing.
One of the most common reasons a company makes a loss but still has positive cash flow is depreciation.
Depreciation decreases the value of an asset, extends the expense of that asset over its useful life, and allows companies to avoid taking a significant deduction in the year the asset is purchased.Net income is calculated by deducting a company’s expenses, including depreciation. However, depreciation is an accounting measure, which means that it is not an outlay of cash, so the expense is added back into the cash flow statement when calculating its cash flow. For example, suppose a company has a net loss for a certain period and has a large depreciation expense amount added back into the cash flow statement. In that case, the company could record a positive cash flow while simultaneously recording a loss for the period.
The sale of an asset within a company also impacts cash flow. For example, when a company sells an asset or a portion of the company to raise capital, the earnings from the sales would be an addition to cash for the period. This could result in a company experiencing a net loss while recording a positive cash flow from the asset’s sale if the asset’s value exceeded the loss for the period.
Accrued expenses also have an impact on net income and cash flow. Accrued expenses occur when a company records an expense for purchasing an asset but does not have to pay for it until a future period.
Expenses are recorded when they are incurred, not when they are paid. Therefore, a company can record a substantial expense during the last month of the year but not have a cash outlay until the following year after the invoice is paid. As a result, the company may record a net loss at year-end while maintaining a positive cash flow
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