Discussion Question:

ABC Company is engaged in the manufacturing of electronic equipment. The Company has
reported net loss for the year 2013 but its Cash Flow Statement is showing a positive net cash
flow. Being a student of Business Finance, you are required to discuss briefly the reasons behind
the difference between net result of Income Statement and Cash Flow Statement.
Today the topic of our discussion is: Income Statement Analysis.
We are provided with a case and we have to discuss the reasons why there is a difference
between net result of Income Statement and Cash Flow Statement.
As we know that the Income Statement (aka: Profit and Loss Account), is a financial statement
that identifies the profitability or performance of a firm over a specific time period, it includes
revenues as well expenses, the difference of both is given as either profit or loss.
The Cash Flow Statement on the other side, is a financial statement that points the cash flows of
a firm in a given period, it has three heads; cash flow from; operating, investing and financing
activities.
As mentioned in our scenario, there occurs a difference between both the figures, i.e. the income
statement shows a net loss while the statement of cash flows shows a positive figure. This
situation might occur due to the following reasons:
1. First of all, income statement reports various expenses which also include expenses
involving non-cash items such as depreciation, amortization etc. here in our case one of
the expenses i.e. depreciation on capital equipments is charged but it might not have been
adjusted in the cash flow statement, and also if the company holds an intangible asset,
amortization might also not have been charged. The difference might occur in the cash
flow which is showing a positive cash flow because the non-cash item of depreciation or
amortization are non-added back to the cash flow statement under the head of cash flow
operating activities.
2. Another reason, for this difference might be the deferred taxes which are also a non cash
item. Although the company will not pay any tax in the current year as it has incurred a
net loss but the deferred taxes might not have been added back in the cash flow statement
causing the income statement giving a net loss while the cash flow statement reports a
positive cash flow.
3. One more reason behind this situation might be the non-operating expense, such as a loss
on the selling of an asset which is reported in the income statement. The company might
have incurred a loss on selling an asset and this figure would not have been adjusted in
the cash flow statement (under the head of cash flow from investing and financing
activities), which is causing difference among both the figures.

(Non cash items are added back in the cash flow statement which are reported as
expenses in the income statement, because they do not involve any cash inflow or
outflow)
4. Another reason might be the application of Generally Accepted Accounting Principles
(GAAPs), i.e. Realization and Matching Principles; the time differences existing between
the recognition of revenue and expenses and the occurrence of underlying cash flows,
might be a reason that both the figures differ.
5. Finally, dividends and revenue received from various financing activities might be
another reason that a difference is observed in the figures of income statement and cash
flow statement.
Above we discussed in detail the reasons with respect to the scenario given to us where for a firm
who manufactures electronic equipments has incurred a net loss in the income statement while its
statement of cash flow reports a positive cash flow.
This brings us to the end of todays discussion.