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How a profitable business runs short of cash

A business can record a profitable sale before its customer pays. Bills may come due in the meantime, making the timing of cash a different question from whether trading earned a profit.

8–10 min

Questions you could explore

  • When is a sale recognized, and when is its cash received?
  • What does a cash-flow statement reveal that an income statement does not?

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Business

Why doesn’t a factory always reach its rated output?

A machine's maximum running speed does not tell you how many usable products leave a factory. Stoppages, changeovers, and rejected output can create a gap between a capacity claim and an actual day's production.

4–5 min

Why doesn’t a factory always reach its rated output?

Business4–5 minA machine's maximum running speed does not tell you how many usable products leave a factory. Stoppages, changeovers, and rejected output can create a gap between a capacity claim and an actual day's production.

Why does one transaction change two sides of the accounts?

Business3–5 minBuying equipment changes more than what a business owns. Paying cash or borrowing the money affects the rest of the accounts differently, while assets must still balance against liabilities and equity.

Why can depreciation differ from an asset’s falling resale price?

Business3–5 minA business may spread an asset's cost across the periods in which it is used. In a simple straight-line model, estimated useful life and residual value determine that allocation, rather than a new market price each year.

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