How can the changes in profit and cash position be contrary? Give an example

As per the accrual base the may gain high gross profit in operating activities due to high credit sales . As per the cash base in same company in same year may company result negative net cash flow from operating activities result and actually which is accurate result due to no healthy collections and bad receivable management.

Change in profit depend on the revenue that the company gain which affect the gross profit of the the company in the income statement but as for the cash flow its show for you the cash amount and the money which is available in the main time for the company to cover its liability the company can exist profit for the period but do not have much cash ,can be as receivables or stocks .

Profit and cash-flow are related financial measurements in accounting but they are not directly linked. Profit is a measure of an company's ongoing sustainability while cash-flow is a measure of the company's ability to pay its bills as they become due. 

 

See, the cash-flow for a particular period is the closing cash balance arrived at after deducting the cash-out (paid) from the cash-in (received). Profit on the other hand, is the amount that remains after deducting from the revenue earned, the expenses incurred in earning that revenue. 

 

Now in accounting, something is only expensed when the economic value is completely used up. But in any given period, an enterprise may have spent far more in cash than was actually expensed by the accounting system. i.e. the company buys 100 x $10 reams of paper to take advantage of a supplier's discount but only uses 50 reams during the financial reporting period.  So while the company outlays $1,000 in cash, it only expenses (uses up) $500 in the financial reporting period.

 

Similarly in revenue, a company may make sales revenue of $1,000 for the same financial reporting period but if 50% of those sales were made to customers who used their company credit accounts (accounts receivable), then the company would only receive $500 in cash in this financial reporting period. The other $500 would be owed to the company by the customers who will pay the amount in a future reporting period.

 

Using this simple and rather restricted example, you can see how a company can make profit but still be cash-flow negative:

Profit for the period = Revenue ($1,000 total sales) less expenses ($500 used reams) = positive $500 profit

Cash-flow for the period = Cash in ($500 cash sales) less cash out ($1,000 cash paid for reams) = negative $500 cash-flow

This discrepancy in the measures between profit and cash-flow is caused primarily by timing differences. 

To get an accurate picture of a company's profit, accounting only focuses on when the revenue is legally earned and expenses incurred (legally due), without regard to when the cash is actually exchanged. This is known as accrual accounting and is built on the matching principle (i.e. match the revenue earned with the expenses needed to earn that revenue)

To get an accurate picture of a company's cash-flow, accounting only focuses on when the cash is actually exchanged (received or paid) with the legal obligations being extinguished. The profit aspect of when the revenue and expenses occurred, are not considered.

The example above highlights two areas (investing in consumables and offering company credit to customers) where profit and cash-flow doesn't directly align, but there are others. For example:

A pre-payment of an expense like insurance would involve more cash-out than what was expensed.

Investment in things like new equipment which would involve substantial cash-out but the equipment can only be expensed in accounting using depreciation (i.e. written off as an expense proportionally over its years of useful life)

A loan repayment will impact significantly on your cash-out but only the interest component of the repayment will be deducted as an expense from the revenue to determine profits. (The principal component of the loan repayment reduces the company's liability but does not affect the profit)