What you are trying to compare is a company's Income Statement to a company's Statement of Cash Flows.
Put simply, if a company states that they had $1 in Net Income due to GAAP accounting, that does not mean that the company generated, from operations, $1.
Let's make a simplistic analysis. You are Don Earl, Inc. and you have a widget that cost you $30. Assume no liabilities or other various forms of assets and no taxes.
Therefore, on your Balance Sheet you have Inventory of $30.
Now, let's Assume that Dave, Inc. purchases that "widget" from you in the next quarter.
Therefore, you report "earnings" next quarter.
Income Statement:
Revenues: $50 (Dave, Inc.'s purchase)
Cost of Goods Sold: $30
Profit: $20
Now, I have not yet "paid" you, therefore that $50 is on credit.
In the previous period, you had one asset which was Inventory valued @ $30.
The current period, your Inventory went to $0 (you sold the widget); however, your Accounts Receivable Increased to $50
As for your cash flows
Net Income: $20
Decrease in Inventory: +30
Increase in A/R: -50
Cash Flow from Operations: 0 |
