I understand the concept, that people does it for tax advantages and I would understand the concept for a period of maybe up to 3-5 years but not for 10 years + while assets are growing tremendously.
The answer “tax fraud” is a little bit to easy because it doesn’t pop up the whole time.
I didn’t found the answer on the first google page but I’m also happy with an simple url 🙂
Thx for your time
In: Economics
Profit is not the same as cash flow.
If I have positive cash flow (more money in than out) I have “made money” in the sense that I’ve got cash leftover to spend. I can buy food, buy a boat, go on vacation, etc. If you maintain positive cash flow forever, life is good.
But cash flows are a lousy measure of how a business is doing, especially over shorter time periods. The whole point of accounting is to line up revenues with their “matching” expenses to more accurately reflect how health the business is. So, for example, if I buy $1 million in supplies this year to help me build widgets I will sell for $5 million next year I’m running a pretty health business but I’ll show negative $1 million cash flow this year (bad) and positive $5 million next year (yay!). Profit is supposed to account for all that but it means it can get out of sync with cash flows.
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