Chapter 11-Cash vs Profit

Question 1

Identify the three main reasons why the change in a firm’s cash position may be different from its profit over the same period

Answer 1

• Some cash items do not affect profit
• Some profit items do not affect cash
• Some items affect both cash and profit, but by differing amounts.

Question 2

Identify two cash inflows that are NOT revenues.

Answer 2

Capital Contribution and Loan Received

Question 3

Explain the effect these items will have on both cash and profit (Cap.Contribution, Loan Received)

Answer 3

Both these items are cash inflows that increase cash but are not revenues and so have no effect on owner’s equity.

Question 4

Why might a firm’s have an increase in cash balance even if it has incurred a net loss?

Answer 4

Cash inflows that aren’t revenues (i.e. capital contribution, GST received)

Question 5

Identify three cash outflows that are not expenses

Answer 5

Cash drawings, Loan Repayment, Cash Payments for Non-Current assets, GST paid.

Question 6

Explain the effect these have on cash and profit (Cash drawings, Loan Repayments and Cash payments for non-current assets

Answer 6

All of these items are cash outflows that decrease cash but are not expenses so have no effect on profit.

Question 7

Explain how an Inventory gain may be the reason why a firm can earn a profit, despite suffering a decrease in cash

Answer 7

Inventory gain is a revenue that increases profit but is not a cash inflow (it represents a gain of inventory) so has no effect on cash

Question 8

Identify three items that will be reported as expenses in the Income Statement but will not be reported as cash outflows in the Cash Flow Statement

Answer 8

Inventory Loss, Inventory Write-Down, Discount Expense, Depreciation, Bad Debts Expense.