What is cashflow
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The revenue and cash inflow will have occurred during the same period. For example if the product is sold immediately after production and the buyer immediately pays the purchase price, the producer will receive a cash inflow in the same period the product was produced. The produced product may or may not result in cash inflow during the period when it is produced. Revenue - value of product produced during a particular time period, perhaps one quarter or one year. These two cash outflows are examples of non-cost items. If the item is paid for and then stored for use during a subsequent production period, the payment is only a cash outflow.Ĭash outflows also include principal payment on a debt or return of capital to the business owner. A cash outflow may or may not be considered a cost.Ĭonsistent with the previous example, a cash outflow will also be a cost only if the purchased and paid for item is used to produce a product during the same time period in which it was paid for. This example of how depreciation relates to cost and cash outflow is based on defining depreciation for management purposes, not for income tax purposes.Ĭash outflow - a payment of cash to some entity outside the business. It is only when the truck is used and it has less value because it has been used that the business has incurred a cost.
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Until the truck is used, the purchase of the truck merely changed the form of the business asset from cash to equipment. Depreciation is the concept that a portion of the cost of the truck needs to be recognized as a cost against the product produced at this time with the use of the truck and many other inputs. A truck purchased and paid for in the past was a cash outflow at that time, but it is not a cost until it is used. Likewise a piece of equipment is not a cost until it is used. For example, fuel purchased and paid for last year, and stored in inventory until it was used this year, is a cost of this year because it was used in this year's production. The cash outflow occurred last year when the fuel was purchased, received and paid for. A cost may or may not require a cash outflow.Ī cost may not include a cash outflow. This page does NOT address income tax law but instead, describes these concepts as they need to be understood by managers for non-tax (managerial) purposes.Ĭost - the value of inputs used to produce a product (output).
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This explanation relies on examples from production agriculture (i.e., farming and ranching), but the concepts also apply to other businesses.Ĭonfusion over these concepts is further complicated by income tax law, especially income tax law for production agriculture that de-emphasizes the difference between cost and cash outflow. The explanation begins by defining the concepts and then presenting several examples to illustrate their differences and similarities. This page describes the difference between a cost and a cash outflow much of the explanation also can be used to describe the difference between an income statement ( exit this site) and a cash flow statement ( exit this site). These concepts are not the same (and the terms cannot be used interchangeably), but they often arise at the same time and from the same transaction, and thus are easily confused. A challenge for managers is to understand the difference between 1) a cost and 2) a payment or cash outflow.