Cash Vs Profit

[Seamus Wong]

Hi Guys,

Can someone please mark my answer (out of how ever many marks you would assume it would be worth in a sac or exam)
My answer looks kinda crap in my opinion, so could you please show me how you would answer the same question?

Explain the Difference between Cash at Profit, providing examples.
 
Cash refers to the inflows and outflows of cash as reflected in the statement of receipts and payments. This includes the flows of cash through loans, capital contributions, sales of non-current assets, and GST Collected and payed. Profit, however, refers to the revenues earned less expenses incurred, and thus it includes none of the above items. Items such as cash or credit sales, discount revenues and discount expenses, inventory losses or gains and sales returns do however contribute to the profit, since they all represent a revenue earned or expense incurred. Therefore, cash is not the same as profit.


Thanks

[jurisprudence]

Hey! It’s really great that you’re working hard on theory questions in VCE Accounting, as they are often an area that students lose marks in.

Here are some things I would recommend regarding your response.

• Personally, I would use the phrase 'Cash Flow Statement' rather than 'statement of receipts and payments' as this is what is specifically mentioned in the study design.
• Your use of examples is excellent, and definitely communicates that you understand the difference between cash and profit. However, I would recommend going into more detail to explain why they are included in the calculation of profit and not cash (or vice versa).
• When explaining the difference, you need to go into more detail. For example:
         - Some items that affect cash do not affect profit.
         - Some items that affect profit do not affect cash.
         - Some items affect both by differing amounts.

Here is quick sample response, however it could definitely benefit from some more examples and refining depending on the mark allocation. I've kept a similar introduction to yours to replicate your style of writing.

"Cash and profit are different things. Cash refers exclusively to the inflows and outflows of cash, as reflected in the Cash Flow Statement. Alternatively, profit is calculated by deducting revenues from expenses. Whilst some items affect both cash and profit, this is not always the case.

One reason cash and profit are different, is that not all cash inflows and outflows are revenues or expenses. For example: the receipt of a loan increases the bank balance of the business, and therefore cash. However, as it has no effect on the owner’s equity of the business, it is not included in the calculation of profit.

Comparatively, not all revenues and expenses affect cash. For example: an inventory loss decreases assets and owner’s equity, and is therefore an expense, however there is no corresponding cash flow.

Furthermore, some items affect cash and profit by differing amounts. A credit sale will increase sales revenue and therefore profit. However, the cash collected by the business as a result of that sale may differ, due to factors such as discount expense and GST.

Therefore, it is clear that whilst cash and profit may be related, they are very different things."