Lesson 13 - Cash vs Profit

Question 1

What is cash in a business context?

Answer 1

In a business context, cash refers to physical currency, coins, and funds in a company’s bank accounts that can be used for transactions and payments to assist with the day-to-day running of the business.

Question 2

What is profit in a business context?

Answer 2

Profit is the financial gain a business makes after deducting all its expenses from its revenue. It represents the net income or earnings generated by the business.

Question 3

How is cash different from profit?

Answer 3

Cash is the actual money a business has on hand, while profit is a measure of the business’s financial performance and is calculated based on its income and expenses.

Question 4

Can a business have cash without making a profit?

Answer 4

Yes, a business can have cash on hand even if it’s not profitable. This can occur when the business receives loans or investments, or if it collects money from customers before incurring expenses.

Question 5

Can a business make a profit without having much cash?

Answer 5

Yes, a business can make a profit on paper by generating more revenue than it incurs in expenses, even if it has limited cash due to ongoing expenses or debt payments.

Question 6

How do expenses affect cash and profit differently?

Answer 6

Expenses reduce profit when they are incurred, but they may not immediately impact cash flow if they are paid at a later date.

Question 7

What happens when a business generates a profit?

Answer 7

When a business generates a profit, it means that it has earned more money than it has spent on operating costs and expenses.

Question 8

How can a business increase its profit while managing its cash flow effectively?

Answer 8

To increase profit while managing cash flow, a business can focus on strategies like controlling expenses, increasing sales revenue, and optimizing its operations to ensure it operates profitably while maintaining sufficient cash reserves.

Question 9

A cash surplus is…

Answer 9

An increase in the Net Cash Position = Cash Surplus (i.e. Cash receipts > cash payments so we have more cash coming into the business than go out)

Question 10

A cash deficit is…

Answer 10

A decrease in the net cash position = Cash Deficit (i.e. Cash payments > cash receipts so we have more cash leaving the business than coming in.)

Question 11

Which financial report allows is to monitor our Net Cash Position/Closing Bank Balance?

Answer 11

Statement of Receipts and Payments.

Question 12

The Statement of Receipts and Payments is a consolidated report based on the data from which two journals?

Answer 12

Cash receipts journal
Cash payments journal

Question 13

T/f - The Statement of Receipts and Payments helps a business to calculate its profit or loss.

Answer 13

False - only the Income Statement calculates profit or loss.

Question 14

What is the structure for a Cash vs. Profit exam question?

Answer 14

Structure:
1. Cash and Profit are two different measures of performance.
2. Net profit is revenues earned minus expenses incurred, whilst net cash is cash receipts minus cash payments. There are some items that will impact net profit but not net cash and vice versa.
3. One example is …
4. Another example is …