Impact of saving on cash
flow
The saving
in expenditure though does not mean the increase in cash flow, however, because
the expense is reduced, it means there is low cash out flow and net effect is
increase in cash flow.
Example of saving on cash flow
A new
project will result in repair and maintenance cost by $ 50,000. The accounting
profit is expected $ 100,000. Calculate the cash flow?
|
Accounting profit
|
$
100,000
|
|
Repair Saving
|
$ 50,000
|
|
Cash flows
|
$
150,000
|
How cash flow is calculated from
accounting profit
The non cash expenditure is added back to profit while the
non cash profit is deducted from the accounting profit for calculating cash
flow. The expenditure is added back for the reason that depreciation is
deducted as expense but it did not result in cash outflow similarly profit is
deducted because these were added to profit without cash inflow.
|
Accounting profit
|
$ 200,000
|
|
Depreciation
|
$ 100,000
|
|
Cash flows
|
$ 300,000
|
