1       Profit

  1. Profit is affected by accounting policies and estimates such as provision etc.
  2. Profit is affected by inflation.
  3. Profit includes non-cash expenses such as depreciation, irrecoverable debts etc.
  4. There are more than one profit figure in statement of comprehensive income. It can be difficult for different users to decide on profit figure to use such as GP, PBIT, PBT & PAT.
  5. Profit is calculated based on accrual principle, which is difficult to understand by non-financial users.
  6. Accrual principle is open to abuse when more than one accounting treatment is available or when no detailed guidance is provided by standards, such as revenue recognition.
  7. Payments and expenses can be deferred and receipts and revenues can be accelerated by offering trade discounts, cash discounts etc, which can distort underlying operational performance. Most users such as shareholders are interested in operational performance, which they evaluate with the help of financial statement and ratio analysis (see later).

2       Cash Flow

  1. Cash flow is not affected by accounting policies, estimates, inflation, non-cash expenses, and accrual principle.
  2. Cash flow is not subject to choice, as in case of profit.
  3. Cash flow is easy to understand by non-financial users.
  4. Cash flow is considers more reliable measure for undertaking investment decision. Cash flow directly relates to objective of profit making entity i.e. wealth maximization.

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