Why can cash balance decrease over a period of time, even though a profit is made ?


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I'm studying for my exam in a couple of days time and came across a question I'm not too sure how to answer.

The owner of a business has come to you asking about his current business situation. He needs an explanation as to why his cash balance could have decreased over the year when the business made a small profit of $1600.

I need to provide a few sentences on this situation.

Help would be greatly appreciated, thank you very much.
 
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kirby

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Cause business is on accrual method
And so far they have accrued income Dr Receivables CR Revenue
and not collected cash
while they have paid out cash (for expenses and salaries) which decreased cash
and
by the way
that's why the Statement of Cash Flows became a required financial statement
 
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bklynboy

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Could be many things. For instance he used cash to purchase assets or other investments. Just because cash is down is not a bad thing as it depends on other factors. Best to look at a cash flow statement to see the ins and outs.
 

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