Q: Where do we enter current year profit and retained earnings in the cash flow statement?
There are two versions or methods or ways to present the cash flow statement. Current year profit is part of one version of the cash flow statement and excluded from the other version. And as you'll see below, retained earnings are not part of either version.
Retained earnings is simply accumulated profits. It is the total of profits that have been accumulated over the years for the business. Retained earnings is shown on the balance sheet under the owner's equity section.
Why is profit and retained earnings not included in the direct method of the cash flow statement? Simple. Because both of these profit items do not represent cash.
Remember that profit equals income minus expenses. And both income and expenses can occur with or without a movement of cash. For example, one has the telephone bill as an expense but you don't pay it before the end of the year. This is known as an accrual item, which basically means something occurring on credit.
The direct method of the cash flow statement only shows cash items. So profits (and retained earnings) are not shown here, only flows of cash coming in and going out.