How can a company with a net loss show a positive cash flow?

A common explanation for a company with a net loss to report a positive cash flow is depreciation expense. Depreciation expense reduces a company’s net income (or increases its net loss) but it does not involve a payment of cash in the current period. For example, if a company purchased equipment last year for $2,100,000 and depreciates the equipment over seven years, its depreciation expense this year might be $300,000. This year’s $300,000 entry involves a debit to Depreciation Expense and a credit to Accumulated Depreciation. Not a penny left the checking account this year. (All $2,100,000 of cash left the checking account last year.) If the company’s income statement reports a loss of $50,000 after the $300,000 “non-cash” depreciation expense, its cash may have actually increased by $250,000.

Another explanation involves accrual accounting. A corporation must report its expenses as they are incurred and that is often before the corporation pays the invoice. For example, a corporation with an accounting year ending December 31 might have a huge expense at the end of 2006, but the invoice is not due until January 2007. The 2006 net income was reduced, but the corporation’s cash is not reduced until 2007.

Here’s one more example. A corporation might receive a deposit from one of its customers in December 2006, but will not earn the revenues until 2007. In that case, the corporation’s cash increased in 2006, but the corporation’s revenues and net income will not increase until 2007.

It is a good idea to get comfortable reading the statement of cash flow. It should be included with a corporation’s income statement and balance sheet.

Learn more about the Cash Flow Statement.