Why cash flow and profit diverge

Under accrual accounting — the standard used almost universally — revenue is recorded when it is earned, not when cash is received. This creates a systematic gap between reported profit and cash in hand.

• When a company makes a credit sale, it records revenue immediately, boosting profit on the income statement.
• But no cash arrives until the customer pays, which may be 30, 60, or 90 days later.
• The amount owed by customers sits on the balance sheet as accounts receivable — an asset, not cash.

The result: a company can report rising profits quarter after quarter while its bank balance falls, if customers are slow to pay. Strong revenue growth funded by credit is a classic exam trap.