Profit & Loss Report versus Statement of Cash Flows

Most QuickBooks users rely on the Profit & Loss Standard report to monitor how their businesses are doing. However, there is an even better and more valuable report that can offer you a more detailed insight – the Statement of Cash Flows. Both P&L (The Profit & Loss Standard) report as well as cash flow statement are subsets of the financial statement report. P&L report is important in its own right, but it only provides partial insight into the health of your business. While the P&L shows what you have earned and spent, the Statement of Cash Flows gives you an insight on where the cash came from and went to, also known as sources and uses. As you’ll see in this article, you can use the Statement of Cash Flows to determine how the various financial activities can increase or decrease your cash balance during a given report period.

Cash versus Accrual

Unlike some accounting packages, QuickBooks allows you to run most reports on either the cash or accrual basis. Cash-basis means that transactions don’t appear on your Profit & Loss statement until either your customer pays his invoice or you pay a vendor (or employee). Subsequently, if you enter a bill in QuickBooks to be paid later, the expense won’t immediately appear on a cash-basis P&L report. Similarly, invoices that you send to customers won’t immediately appear on such a report either. The expense appears when you write a check to the vendor, and the revenue appears when the customer honors the invoice. Accordingly, cash-basis reports don’t necessarily project a company’s actual financial performance. You could have a stellar looking Profit & Loss Report, but a list-full of unpaid bills in QuickBooks. Accordingly, many accountants prefer that business owners use accrual-basis reports.

Accrual-basis reports recognize the effect of every transaction on your P&L immediately. Customer invoices appear on accrual-basis P&L reports as soon as you save the transaction, as do unpaid vendor bills. You can easily see the significance of these differences.

Note: Cash-basis reports only reflect paid transactions.

Note: Accrual-basis reports include all transactions – both paid and unpaid.

Accrual-basis reports provide a much better picture of where the business stands, but can make it harder to understand your current cash position. However, a cash-basis P&L isn’t a panacea for managing cash flow, as your business has many transactions that don’t affect the P&L. For instance, loan payments, owner distributions, and owner contributions affect your balance sheet, which tracks assets, liabilities, and equity. Fortunately, the Statement of Cash Flows can come to the rescue as it reflects these types of transactions and more, so it’s a great companion to both cash-basis and accrual-basis P&L reports.

Set Your Preference

You can instruct QuickBooks to always display your reports on either cash or accrual basis:

• Choose Edit, and then go to Preferences.
• Choose Reports & Graphs, and then Company Preferences.
• Specify either Cash or Accrual, and then click OK.

Note: You can set either cash or accrual as your default report format.

Of course, at any time you can change a report to the other format. For instance, if your preference is set to accrual, but you may sometimes want to view a cash basis P&L:

• Choose Reports, Company & Financial, and then Profit & Loss Standard.
• Click the Modify Report button, and then choose Cash in the Report Basis section.

Tip: You can change the accounting method for your P&L on the fly.

NOTE: Most, but not all, reports in QuickBooks allow you to change between cash and accrual. When a report is onscreen, choose Modify Report. If you don’t see the Report Basis section, then you’ll know that you can’t toggle the report basis. Now that you understand the ins-and-outs of running cash and accrual basis reports, let’s explore the Statement of Cash Flows.

The Statement of Cash Flows

Let’s say that your cash balance at the beginning of your fiscal year was $100,000, and today it is $75,000. The net income figure on your P&L won’t give you the full details on why your cash balance decreased, but the Statement of Cash Flows will. To do so, choose Reports, Company & Financial, and then Statement of Cash Flows. There are plenty of options that such as report periods, operating activities, accounts receivable, inventory asset, accounts payable, prepaid insurance, etc. to choose from in order to obtain a clear picture of three major areas:

• Operating Activities
• Investing Activities
• Financing Activities

Don’t worry if your report only includes one or two of these sections — sections only appear when you had relevant transactions during the report period.

As you look through the Statement of Cash Flows, you may also see Investing and Financing activities. Investing activities may include owner contributions as a source of cash. In the end, you’ll see exactly what caused your cash balance to increase or decrease during the report period.

Organizing the Statement of Cash Flows

QuickBooks makes an educated guess at what type of accounts in your chart of accounts should appear on the Statement of Cash Flows. However, you may encounter instances where activities appear in the wrong section, or don’t appear at all on the report. You can easily remedy such situations:

• Choose Edit, and then Preferences.
• Choose Reports & Graphs, and then Company Preferences.
• Click the Classify Cash button.

Place a check-box in the appropriate column. You cannot remove balance sheet accounts from the statement, but you can optionally include income and expense accounts. However, keep in mind that this is not a typical need, and you should only proceed under the guidance of your accountant or tax adviser.

Therefore, during a financial statement preparation, both P&L report as well as statement of cash flow play significant roles in projecting the financial status of the company for a given time period.