Can someone put this in English please? CM practice exam

topcat
topcat Registered Posts: 452
in AAT Level 3 (Level 6 in Scotland)
Practice exam 2 questions 1.2:

True of false question:

"Profit differs to cash due to non-cash adjustments processed through the financial statements"

urm what?

Answer below but i dont understand what questions 1 and 2 mean :(

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Comments

  • welshwizard
    welshwizard Registered Posts: 465 Dedicated contributor 🦉
    Non-cash adjustments - think accruals, prepayments and depreciation.

    An accrual does not actually affect the cash does it??
    A prepayment does not affect the cash
    Depreciation is a non-cash adjustment

    Remember we account for accruals and prepayments as well as depreciation in the Income Statement yet they don't all have an effect on cash do they?

    Any clearer?
  • topcat
    topcat Registered Posts: 452
    thank you i am a bit clearer now !

    just a bit confused about the start of the statement "profit differs to cash" how does it?
  • Nps
    Nps Registered Posts: 782
    Profit is just a theoretical concept. You can't generally hold profit in your hand, but you can hold cash. You may have a £3000 profit on paper yet have no actual cash to show for it as the profit is tied up elsewhere.

    Profit cannot be used to pay debts which is why it is important for entities to look at their cash flows to ensure they have the actual cash to pay their bills.

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