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“Cashflows are objective. Profits are subjective and can be manipulated.”
Tutor can you please have some light on it with an example?Cash flows are a fact – they can be checked for example on bank statements and there is no argument as to what they are.
Profits depends on things such as the rate and method of depreciation charged, what % allowance for receivables is made, how accruals and prepayments have been estimated. All of these are the decisions of the accountant preparing the accounts and there are no rules as to what rate of depreciation to charge etc.. That is why they are subjective.
If a company wants to show a higher profit then they can easily do this by charging a lower rate of depreciation or having a lower % allowance for receivables etc.. That is manipulating the profit.
However none of the above will affect the actual cash that the company has received or paid.
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